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Can non-capital gains funds be co-mingled with capital gains funds for an Opportunity Zone investment?

Can non-capital gains funds be co-mingled with capital gains funds for an Opportunity Zone investment? If so, how are they treated at the back end?

  • John Wegmann
    July 31, 2019

    You can make an investment in a QOF for an amount greater than the capital gain that you are seeking to defer. However, you are treated as having made two separate investments: an investment of capital gains which qualifies for QOF benefits and a separate investment that does not get QOF benefits. It becomes necessary to track this as two separate investments throughout the lifecycle of the fund.

  • Brian Keida
    April 28, 2019

    Non-capital gains funds (cash) can be co-mingled with the cash from a capital gain for capital contributed to a fund. The non-capital gain will not get the same benefits as the capital gain cash, though. With the non-capital gain funds there is no gain deferral or step-up in basis, so that portion of the investment will be treated similar to investing in a regular fund.

  • Blake Christian
    April 26, 2019

    Sorry for the delay. Yes, you can invest after-tax amounts (e.g., non-capital gains) into a QOF. These create what is known as a "mixed-use" fund. Those investing after-tax amounts will get full tax basis in the QOF (vs. zero for those investing qualified gains) at day one, but will not get the various tax step-ups at years five, seven and 10. So it's treated like any other business.

  • Blake Christian
    April 24, 2019

    Yes, they can, and the regulations will bi-furcate the fund into qualifying and non-qualifying subfunds. The non-qualifying funds will get no step up at five, seven or 10 years. Investors may still want to piggyback off of the QOF structure if they know the track record of the fund managers, but they cannot expect any tax breaks under the OZ program.

  • Valerie Grunduski
    April 16, 2019

    Both investments linked to eligible deferred capital gains and those that are not are permitted. That said, these two separate types of investment must be tracked separately as the benefits of the program only apply to the portion of investment funded with deferred capital gain.

  • Paul Wassgren
    April 11, 2019

    Yes, non-capital gains equity can be invested into a Qualified Opportunity Fund, but it will not participate in the tax benefits.