How is depreciation treated before refinancing in an OZ real estate investment?

Answers

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  Marko Belej

  Taft

  September 02, 2022

  There will be an inside / outside basis mismatch. Although the outside tax basis in your qualified opportunity fund (QOF) interest will initially be zero (and will remain at zero if you haven't been allocated any profits or liabilities), the qualified opportunity zone business (QOZB) generally will have a cost basis in its depreciable assets. Accordingly, the QOZB can depreciate the assets, and the depreciation deductions will be allocated to you (through the QOF), but they will be suspended under the basis limitation of Section 704(d) of the Code.

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  Matthew Rappaport

  Falcon Rappaport & Berkman

  September 02, 2022

  The outside basis could be higher because of acquisition indebtedness. But if the outside basis is insufficient to absorb the tax losses, they'll be suspended under Section 704(b) until the QOF has income or gain to free them up.

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