Or would this impact taxes for everyone involved?
This is more of a question best asked of an attorney. However, you can generally have different classes of investors with different rights. It is likely you could work with your attorney to create a structure that would accommodate dividends/distributions to some investors and no dividends/distributions to others. However, the accounting for a structure like that can be extremely complicated.
It is possible to structure a QOF (or parallel funds) in a way that the sponsor can raise both qualified gain equity and non-qualified equity. However, the QOZ benefits would only benefit the qualified gain investors.
You can have a mixed fund without destroying benefits to the other investors. You will need a good accountant to keep track of it.
Yes, absolutely. A QOF can definitely accept non-qualified OZ investment funds just as it accepts qualified funds. The taxpayer who invested such non-qualified funds would simply have no tax benefits in connection with the OZ tax code section. It would be no different than that taxpayer investing in a normal fund. In other words, there is no impact on the OZ fund where the funds are coming from. The fund manager would not necessarily care what type of funds they are (qualified capital gains or non-qualified with no cap gains) since there is no tracking or reporting at the fund level. I don't quite understand what you mean by paying out the benefit to non-qualified investors.
It can be done. It's called a mixed fund.
Yes, and this is an important issue to consider, as the non-OZ investors may have different expectations and timing concerns than the OZ investors, and there will most likely be different control and tax issues to take into account. Take the time to understand these issues and determine solutions in advance.
Any OZ fund can accept non-qualified gains, but this creates a "mixed fund" and the non-qualified bucket is ineligible for the five- and seven-year tax step-ups and any gains are fully taxable, even after a 10-year hold.
A fund can accept both qualified and nonqualified investments. As to the payout, it will be a matter of how you structure the deal.
Yes, it may accept non-qualified OZ funds, but the non-qualified investors will not be able to benefit from the OZ 1400Z tax benefits. There is a bifurcation. It would not affect the QOF equity.
I am honestly not sure and would have to research. But there is no tax benefit whatsoever for investments that are not capital gain rollovers into a QOF. Probably best to use a dual structure of QOF receiving capital gains and a sister company receiving noncapital gains. But the economics for noncapital gain rollover investments is much more challenging.
Yes, but nonqualified investments get no OZ tax benefits.
This is two different questions, really. An OZ fund can accept non-capital gain money. To the extent money has not come from non-capital gain, the investor providing the funds is not eligible for QOZ tax benefits. An OZ fund can have non-OZ investments, but if the OZ fund is out of compliance, penalties and potential decertification might apply.
Yes, you can have mixed funds.
No special structure would be required . A fund can accept capital gain and non-capital gain monies into the same fund. Let's call this a mixed investment. It will create significant additional accounting. If you identify to the Opportunity Zone fund manager a mixed investment, the fund manager will be able to calculate your investment as two separate investments. This would be similar to investing both IRA and non-IRA money into a limited partnership. If the fund manager is not notified, the investor will need to allocate all reporting as though it came from two separate investments. This separate accounting will be needed for the initial deferral and separate basis calculations. When the fund sells after 10 years, the portion not from a capital gain would be taxable if there were a gain. The portion of gain originally from a capital gain would tax-free. If there were a death, the portion not from a capital gain would get stepped up in basis to market value of the investment upon death. The portion from the capital gain would not get a step up in basis until 10 years passed. The bottom line is that you should notify the fund manager if any amounts invested are not from a capital gain. The manager is better able to handle the accounting than the investor.
Funds can have mixed sources of capital, but it gets complicated. Another option is to have a side fund with the non-capital gains funds. This is a question to discuss with a tax lawyer, though, which I am not.
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