Opportunity Zone Magazine Opportunity Zone Magazine Volume 1, Issue 1 | Page 75

DISSECTING OPPORTUNITY ZONE FUND STRUCTURES
as partnerships. Pass-throughs, like a partnership, may have
six months from the date of sale of the capital asset to invest
in a QOF at the entity level, which would effectively force
all partners to invest in a QOF. Alternatively, the partners
(or owners) may have six months from the end of the tax
year of the entity to invest in a QOF. This is a powerful gift
from the IRS which will allow more time to plan the QOF
investment by interested investors. It also allows owners of
pass-throughs that have disposed of capital assets in 2018,
and were not aware of the program, to still take advantage
of the program in 2019 with the extended time horizon to
invest in a QOF.
Other important clarifications from the proposed regulations
that aid investors are that cash is treated as being fungible,
such that the exact same funds realized on disposing of a
capital asset are not required to make the QOF investment.
In fact, even borrowed funds may be used to fund a QOF.
Moreover, the interests of a QOF may be pledged as security,
which may be useful later in the lifecycle of the QOF
investment in 2027 when the tax bill will become due and
funds will be needed to pay the tax piper.
PRACTICAL IMPACTS: QOFS
For those forming QOFs, one of the most important
clarifications is that QOFs can be set up as LLCs taxed for
federal income tax purposes as a partnership or corporation.
This clarification will enhance flexibility within the QOF
and not subject the QOF to general partner requirements or
partnership liability at the state level. One item to be aware
of is that QOFs must be formed for the purpose of being a
QOF, so states that do not allow for customized formation
documents for LLCs may add additional risk to using an LLC
as a QOF in such a state.
For those forming QOFs,
one of the most important
clarifications is that QOFs can
be set up as LLCs taxed for
federal income tax purposes as
a partnership or corporation.
The proposed regulations also clarify that investors may
break up their rollover of capital gains into multiple QOFs.
This allows the investors to diversify risk and allocate their
capital gain among multiple QOFs, which are most likely to
be single asset QOFs. Due to the new rules in the proposed
regulations and still existing uncertainties unanswered by the
new proposed regulations, many advisors are suggesting single
asset QOFs to reduce risk and allow for easier disposition of
the interest in QOFs.
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