You can try your best to navigate the disguised sale regulations regarding refinances and see if a structure like that might work, but you'll never be able to get to a guarantee on this.
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Is it possible to sell QOF member interest in a QOZB to new QOF members?
Real Estate development project building under construction in OZ area and the QOZB owns the single member LLC that owns the land, development rights, and bank loan. Currently in the QOZB, there are two QOF members and two non-OZ members. The two non-OZ members are going to assign their interest to one new QOF with additional deferred gains which will be a new member. The two existing QOF members are selling 50% of their interest for double their "cost basis." Which in theory would create a new capital gain or taxable event. This apparently is not allowed and looks like a disguised sale and related parties involved in the new QOF member. Any ideas on how to get the new QOF member into the deal and reduce the existing QOF ownership and get their money back out to the OZ fund entities?
Answers
The key for the new Qualified Opportunity Fund (QOF) is that the QOF must acquire an interest in the Qualified Opportunity Zone Business Funds (QOZB) from the QOZB for cash. Accordingly, the QOZB interest transferred from the two non-Opportunity Zone (OZ) members to the new QOF (per your description) will not satisfy this requirement. In addition, as you indicated, there is probably a disguised sale if the QOF contributes cash to the QOZB and the QOZB reduces the existing members' interests, in which case the QOF will not be treated as acquiring a QOZB interest at original issue. The one possible exception is that the disguised sale rules for partnership interests may not apply if the partner receiving the cash is liquidated entirely (the proposed partnership interest disguised sale regulations contained such an exception before they withdrawn, because the abuse associated with disguised sales of partnership interests is generally not present with a complete liquidation of a partner's interest).
The key for the new Qualified Opportunity Fund (QOF) is that the QOF must acquire an interest in the Qualified Opportunity Zone Business Funds (QOZB) from the QOZB for cash. Accordingly, the QOZB interest transferred from the two non-Opportunity Zone members to the new QOF (per your description) will not satisfy this requirement. In addition, as you indicated, there is probably a disguised sale if the QOF contributes cash to the QOZB and the QOZB reduces the existing members' interests, in which case the QOF will not be treated as acquiring a QOZB interest at original issue. The one possible exception is that the disguised sale rules for partnership interests may not apply if the partner receiving the cash is liquidated entirely (the proposed partnership interest disguised sale regulations contained such an exception before they withdrawn, because the abuse associated with disguised sales of partnership interests is generally not present with a complete liquidation of a partner's interest).
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