It can only make destructions to the extent of basis. After two years, funds can distribute borrowed funds.
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What provision limits an investor’s OZ benefits if they receive large distributions in the early years of the QOF?
What provision limits an investor’s OZ benefits if they receive large distributions in the early years of the QOF?
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If the distributions are in excess of basis, the distributions are an inclusion event to the extent of the excess. You'll have this problem if the distributions exceed your share of taxable income. In general, in the first two years of a QOF, you should only be distributing operating cash flow, a practice which will avoid the issues you're talking about.
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