Ever since the Tax Cuts and Jobs Act (TCJA) introduced qualified opportunity zones, real estate owners have been eager to begin investing in opportunity zone properties. There are certainly a lot of benefits. But with this brand-new concept have come significant questions.
We’ve put together a Q&A covering real-estate owners’ top five opportunity zone concerns:
1. What happens if I do tenant improvements on the building I am renting?
Any improvements made by a lessee to leased property will also be considered a qualifying asset for the purposes of qualified opportunity zone business property (QOZBP).
2. What happens if I do a triple-net-lease?
The latest set of proposed regulations includes language that “merely entering into a triple-net-lease with respect to real property owned by a taxpayer is not the active conduct of a trade or business by such taxpayer.”
However, a lot of questions remain on how to interpret this. Does this necessarily throw businesses with triple-net-leases out? Could they have a triple-net-lease and still meet the facts and circumstances of having the active conduct of a trade or business? How does the IRS define a triple-net-lease that would be prohibited? Hopefully this will be cleared up in the final regulations, but for now we are working with many clients to help structure their QOZB around this issue.
3. A real estate business traditionally has debt-financed distributions. Is this possible with the opportunity zone structure?
The proposed regulations clarify that debt-financed distributions are generally allowable from a qualified opportunity fund (QOF), depending on whether the partner has basis in the partnership interest (which includes that partner’s share of the liability). However, there are specific rules when the distribution occurs within two years of the investment in a QOF. We suggest consulting with your tax advisor regarding any distributions from a QOF, but particularly in the first two years to avoid any dire complications.
4. Can my carried interest qualify as a qualifying opportunity zone investment?
The proposed regulations are clear in stating that any interest received for services (e.g., a developer fee or promotion) will not be eligible for the opportunity zone tax benefits. If an investor has both a capital gain contributed and a carried interest component, they will have a mixed-fund investment and will need to track their interest separately.
5. I bought a building located in a qualified opportunity zone. How long do I have to meet the substantial improvement qualifications?
Under current regulations, you can meet the substantial improvement requirement, if, during any 30-month period beginning after the date you acquire the building, the additions exceed the original basis in the building (not the land) at the beginning of the 30-month period.
Have any more questions?
Contact us! At Wipfli, we have the experience and knowledge our clients need to navigate the intricate rules around opportunity zones, and we’re committed to keeping up with changing regulations so you can best benefit from investing in qualified opportunity zones. Click here to learn more.