I am underwriting a deal in which I, along with a group of investors, will be buying a piece of land in an Opportunity Zone. How do I create a Qualified Opportunity Fund for tax purposes? Does it also need to be a legal entity, such as an LLC?
The fund needs to be structured as a corporation or partnership; LLCs are allowed. Your question is addressed on a Treasury FAQ at IRS.gov. You'll also want to consult the two rounds of guidance Treasury released. You'll find a lot of useful information on the Arizona Commerce Authority's OZ Resources page
Yes, the Qualified Opportunity Fund must be a qualifying legal entity that self-certifies with the IRS using Form 8996.
A Qualified Opportunity Fund can be a new or existing entity. The entity must be formed as a partnership or a corporation. A limited liability company can be a Qualified Opportunity Fund, but it must be taxable as a partnership or a corporation, not as a disregarded entity (a single-member LLC).
First, an entity such as an LLC, corp or S sorp must be created. Then a Form 8996 should be filled out and submitted with the next filing of the entities tax return. The entity must conform to the self-certification tests. Note the entity can not be a disregarded entity. Example of disregarded entities would be single member LLCs, grantor trusts, tenant in common.
For tax purposes a Qualified Opportunity Fund (QOF) can be a partnership or corporation. Once you create the entity, then you must self-certify by filing Form 8996. It does have to be a legal entity. Be careful when self-certifying because it will start your clock on when the QOF has to spend its investments received.
A domestic entity taxed as a corporation or a partnership for federal tax purposes may certify itself as a QOF. It must meet the investment requirements for every testing period.
Yes, you need to engage legal counsel to form an entity, such as an LLC. Also, there can be no “carried interest” or “promote” at the Qualified Opportunity Fund level. A carried or interest or promote can be created at the Qbiz level, hence a two-tier structure is generally recommended. This is not a simple process and most lawyers have no idea how to properly set up a Qualified Opportunity Fund.
Easy to create. Has to be an LLC (not single member) or corp However, easy to foot fault.
Yes, creating a QOF must be a legal entity (corporation or partnership including LLC) that is taxed as such for federal tax purposes (i.e., it cannot be a disregarded single member LLC). Creating a fund, and even more so, insuring proper compliance with the rules governing such funds is highly complex. Therefore, I would not recommend forming a fund and trying to meet the stringent compliance requirements without a qualified attorney and CPA. But to answer your question, yes, form an LLC, partnership, or corporation, meet all the requirements, self-certify by filing the appropriate forms, and continue to maintain the appropriate required file documentation.
Form the entity. It must be something that is treated for tax purposes as a corporation (including S corporation) or a partnership (including an LLC is more than one member). When filing its 2019 tax return (Form 1120 or Form 1065), attach Form 8996 electing QOF status. Please note that this is just the basic formation issue. There are procedural and substantive issues to work through.
Even though the word "fund" is used, a Qualified Opportunity Fund (or QOF) is simply a partnership or corporation, or an LLC taxed as a partnership or corporation that elects to be a Qualified Opportunity Fund, and the complies with the applicable investment and timetable rules. The property must be acquired by the QOF, or (more likely) by a "subsidiary entity," that is, a partnership or corporation, or an LLC taxed as a partnership or corporation in which the QOF invests. As you might imagine, this is just the tip of the iceberg. For example, vacant land by itself will not be a proper investment for a QOF. In general, you will need a written plan to develop the property into an active trade or business within 31 months. And there are other rules, for example, who the property can be purchased from (the buyer must be unrelated to the seller), how to invest the cash before it is used on the acquisition or the subsequent development, and attention to semi-annual testing dates to assure that your fund remains a QOF. We don't know enough about your investors (and my expertise is tax, not securities law) to advise about what you might have to do in order to attend to any securities laws that might apply to them.
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