Basis in the property is $700,000, but assuming you invest $700,000 of GAO. Your outside tax basis. The QOF is zero.
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What is the basis for a ground-up development project in an OZ?
If I buy a $200,000 undeveloped lot in an opportunity zone and build a $500,000 rental home on it, what would be my basis in the QOF? Also, could I do the same with a 99-year lease?
Answers
If you invested $700,000 of qualified gain, then your basis would still be zero. However, if your QOF or QOZ business borrowed the $500,000 to make the improvements and you were liable for the debt, then your basis would be $500,000. A lease greater than 35 years is generally treated as a purchase, but whether leased or purchased, the underlying property can qualify as QOZ property.
When you buy the lot you have zero qualified assets. When you build the structure, you have $500,000, the structure and the land it is built on both become qualified assets. You now have $700,000 of qualified assets. Yes, a 99-year lease would work the same way.
In general, your basis is going to be the $200,000, plus the $500,000. But your capital account will generally not reflect the $200,000 because that is rollover capital gains. Assuming you borrow the $500,000, then that will increase your capital account and your basis. I am not understanding the lease question. Opportunity Zone rules for investment are based on fee simple ownership. I don’t think a 99-year lease will qualify.
Your basis in the QOF is not dependent on the type of property within it. Rather, it depends how you acquired the QOF interest and your debt shares. Deferred capital gain does not confer basis in a QOF interest, but contributing out-of-pocket capital does, as do debt shares.
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