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Can the owners of a QOF have their spouses as its members and invest in residential real property in the zone, then lease it to its members for their personal use?

  • Maria De Los Angeles Rivera
    June 18, 2019

    I do not understand the question. Do you mean if investors in a QOF may lease property owned by the fund? The regulations provide special requirements for leases from related person not to related persons.

  • Shawn Neidorf
    June 18, 2019

    That gets a bit tricky and beyond my knowledge. I would consult a tax attorney who specializes in OZ/OF.

  • Erik Kodesch
    June 15, 2019

    I believe so, but I am not sure it makes sense for tax purposes. Rental payments received by the QOF will be taxable income and, for a personal residence, rent is not deductible. Accordingly, to get the benefit of no tax on appreciation after 10 years, the husband and wife will include in their income 10 years (or longer) of ordinary rental income. You have to run the numbers, but it likely is more efficient for the husband and wife to directly own the residence and get the $500,000 gain exclusion after two years.

  • Forrest Milder
    June 15, 2019

    The answer to this question is not as simple as you might expect. Of course, the latest IRS regulations state that leasing is a trade or business for OZ purposes. However, Section 280A of the code provides that no deductions related to leasing are allowed for leasing to family members, unless the tenant uses the property as their principal residence, and fair rent is charged. Interestingly, that provision does not directly address whether these two features make the activity a "trade or business," but this is the obvious implication of the rule. Of course, if fair rent is charged, then the Qualified Opportunity Fund will have income (and presumably offsetting depreciation and other deductions). So, there will be annual tax returns, there will have to be regular payments of rent, and there may be annual tax liability. This has the potential to be balanced by no tax on the ultimate sale of the property more than 10 years from now. Having said all this, I must note that this is really a technical tax analysis. It wouldn’t surprise me to have the IRS declare that this amounts to an "abuse," and it shouldn’t be allowed. And, of course, don’t expect a whole lot of tolerance from an auditor if you miss a few rent payments or otherwise get sloppy about running this as a "business."