How can my Qualified Opportunity Fund pull out of one Opportunity Zone investment that isn’t doing well during the qualifying period and invest in another Opportunity Zone for the remainder of the qualifying period to still qualify for the capital gains benefits? 

Answers

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  Stephen Vlasak

  Richey May & Co.

  March 18, 2019

  The proposed regulations state the following: Section 1400Z-2(e)(4)(B) authorizes regulations to ensure that a QOF has “a reasonable period of time to reinvest the return of capital from investments in qualified Opportunity Zone stock and qualified Opportunity Zone partnership interests, and to reinvest proceeds received from the sale or disposition of qualified Opportunity Zone business property.” For example, if a QOF shortly before a testing date sells qualified opportunity zone property, that QOF should have a reasonable amount of time in which to bring itself into compliance with the 90 percent asset test. The transactions that may trigger the inclusion of gain that has been deferred under a section 1400Z-2(a) election are the “reasonable period” (see section 1400Z-2(e)(4)(B)) for a QOF to reinvest proceeds from the sale of qualifying assets without paying a penalty; administrative rules applicable under section 1400Z-2(f) when a QOF fails to maintain the required 90 percent investment standard; and information-reporting requirements under section 1400Z-2. A reasonable period time has not been defined in the proposed regulations, but I would guess at a minimum it is 90 days, and at a max it would revert to the original 180 days.

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  Ed Mofrad

  Mofrad Financial Solutions

  March 19, 2019

  So long as you directly roll over the funds from one OZ to another (i.e., without "cashing out" and having access to private funds for other uses) you should be all right.

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  Phil Jelsma

  Crosbie Gliner Schiffman Southard & Swanson (CGS3)

  March 18, 2019

  We don’t have rules on taking money out of one Qualified Opportunity Fund and moving it to another fund. Hopefully this will be included in the next set of regulations due out later this month.

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  Kostas Poulakidas

  Taft Stettinius & Hollister

  March 19, 2019

  Until the new proposed regulations are released (which IRS has indicated it will be soon), all we can conclude is that a QOF has the ability, under certain circumstances, to reinvest proceeds from disposition of QOZ property into a different QOZ property to maintain status as a QOF. Whether recognition of any gains from such a disposition will be required, however, remains unclear (although if the investment is going poorly, there might not be any gains to recognize).

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  Peter McNeil

  Comprehensive Financial Solutions and Tax

  March 26, 2019

  Like any other LLC or corporation, an Opportunity Zone fund can pull out of a bad investment. The term you get when exiting will determine if there is a gain or loss. If you pull out, you may have undeployed cash that could cause a problem when trying to satisfy the 90 percent tangible property test within 31 months. When you invest in a new venture, the 31 months have been reduced for improving assets with your investors' funds. If the new investment is eight months after receiving investor funds, you now have only 23 months to do improvements without being subject to the monthly penalty on the shortfall of tangible assets.

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  Stephen Vlasak

  Richey May & Co.

  April 16, 2019

  The proposed regulations state that a QOF has “a reasonable period of time to reinvest the return of capital from investments in qualified opportunity zone stock and qualified opportunity zone partnership interests, and to reinvest proceeds received from the sale or disposition of qualified opportunity zone business property.” For example, if a QOF shortly before a testing date sells qualified Opportunity Zone property, that QOF should have a reasonable amount of time in which to bring itself into compliance with the 90-Percent Asset Test. The transactions that may trigger the inclusion of gain that has been deferred under a section 1400Z-2(a) election; the “reasonable period” (see section 1400Z-2(e)(4)(B)) for a QOF to reinvest proceeds from the sale of qualifying assets without paying a penalty; administrative rules applicable under section 1400Z-2(f) when a QOF fails to maintain the required 90% investment standard; and information-reporting requirements under section 1400Z-2. Reasonable period time has not been defined in the proposed regulations, but I would guess at a minimum its 90 days, and at a max it would revert to the original 180 days. I hope this helps!

• 

  Elizabeth Humphreys

  Zephyr OZ GP LLC

  March 19, 2019

  As you may be aware, the full regulations have not been released from the IRS. The IRS released proposed regulations which were sufficient to create enough clarity for funds to proceed if they adhere to the most conservative interpretation of the legislation. As such, it remains unclear if a fund may dispose of an asset within the 10-year hold time and still maintain eligibility for the tax benefits for its investors. This question has been raised by several experts to the IRS and should be addressed in the regulations when they are finalized. It is unclear from the legislation if the 10-year hold period refers solely to the investor's interest in the fund or if it applies to each asset in the fund. In the meantime, it is safest to proceed assuming that an asset must be held for the duration of the hold period.

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