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Are distributions in a OZ project tax-exempt?

During the years that capital gains are tax-deferred, are distributions from the project in the Opportunity Zone tax-exempt?

  • Valerie Grunduski
    November 16, 2020

    While the capital gains are deferred until tax year 2026 the investor will likely have little to no tax basis in their investment. As such, unless allocated a share of debt allocations in a partnership or LLC setting, distributions would be in excess of basis. If the QOF does have debt, be careful not to distribute proceeds from the debt offering too soon and trigger an inclusion event.

  • Brad Cohen
    October 10, 2020

    To the extent of basis, they are exempt. It is a little tricky to determine the basis.

  • Matt Campbell
    October 09, 2020

    Generally no, but distributions that do not exceed the basis the investor has may be treated as a return of capital. Since a capital gain investor has zero basis on an OZ investment, there would have to be a basis from qualifying debt to have a tax-free return of capital. Funds for such a distribution might come from a cash-out refinance after a development stabilizes.

  • Matthew Rappaport
    October 09, 2020

    No, they are taxed as normal.


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