Can always contribute. However, the property will be part of the 30% allowed unqualified property for a QOZB. If that is a problem, leasing the property may be an option, subject to related property leasing rules.
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Under what circumstances can a property owner contribute a property to a QOF or QOZB in exchange for equity?
What should be considered in this kind of transaction to reap the maximum tax benefit?
Answers
The contribution should be to the development-level entity directly and not to the QOF, then contributed to the development-level entity. The interest the QOF has in the QOZB should only be from a cash infusion. The contribution to the development-level entity should be at a time such that the contribution does not exceed 20% of the QOF assets otherwise the related party rules will be implicated. If this is too complicated, the property owner can consider leasing the property to the development-level entity.
This type of transaction is not unusual for a OZ real estate transaction, but it can create some challenges, including mixed collateral in a QOF. Assuming the use of the property would qualify for a QOZB (e.g., it's within a QZ and not a prohibited use), both cash or property contributed will work, as stated in the proposed regulations. However, in the case of contributing the property in a carryover basis transaction, the proposed regulations provide that the amount invested shall equal the lesser of the taxpayer’s adjusted basis and the fair market value of the property contributed in the transaction. In all cases, the amount treated as invested is limited to the amount of gain that may be deferred. As a result, if $100 of gain is invested but the adjusted basis is only $60, the $40 will be non-qualifying property and ineligible to take advantage of the program.
Several. 20% or less of the equity or, if acquired post-2017, then no restriction.
A property owner can make a qualifying deferral of capital gain through a contribution of property to a QOF. A contribution of property to a QOZB is invalid for tax benefits under the statute and proposed regulations. Note that if the property contributed has built-in gain, the contribution will be treated as a mixed investment, and the QOF interest will only be partially eligible for QOZ tax benefits.
The second sets of regulations allow the contribution of property to a fund in an amount equal to the gain to be deferred. Special considerations apply to determining basis of the interest. You will need to review whether the related party rules apply to this type of transaction.
The contribution of property into the fund will only create a basis in the fund of the current tax basis, not the market value. No gain is recognized. This may not be a qualified contribution if the contributor has no other capital gains. If the property is sold to the fund, a gain could be recognized and the gain could be invested in the fund as a qualified investment. This will work as long as the total interest in the fund is less than 20%. Otherwise the related party rules will apply and the investment will be determined non qualified for tax benefits.
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