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How and when can I take advantage of owning a commercial property in an Opportunity Zone?

I bought an apartment complex five years ago in Florida, where I have 120 tenants. I just found out that it is located in an Opportunity Zone. Do I have to sell it to take advantage of being located in an Opportunity Zone? Can I transfer it into another entity that I start now to make it an Opportunity Zone business? I have plans to make substantial improvements to the building, so I would like to know what I can do to better use the location.

  • Peter McNeil
    June 14, 2019

    You really need to consult a professional to do get the best guidance for your situation. However, here are two options that you should discuss with a qualified attorney or tax professional. One, you can lease your property to a Qualified Opportunity Fund and gain an interest in the fund. Then you will get the 10 year tax-free advantage on any gain from the sale of interest in the fund. Two, the other option is to sell your property to a Qualified Opportunity Fund. Then any capital gain will be eligible to defer by investing in any Qualified Opportunity Fund. If you invest the gain into the fund you sold the property to, you can not have an interest of more than 20%. This will take away all the tax benefits of an Opportunity Zone investment.

  • Steven Schneider
    June 15, 2019

    The QOF must acquire the property by a purchase from an unrelated party to qualify for QOF benefits with related party status having a low 20 percent relationship threshold.

  • Erik Kodesch
    June 14, 2019

    No need to sell the building, which would not work anyway if you sell it to a QOF in which you own a big enough share of (20%, I think). However, you can lease the building to the QOF and then have the QOF make the substantial improvements as tenant improvements. Just have to make sure the numbers work for the value of the improvements vs. value of the building.

  • Michael Sanders
    June 13, 2019

    This is a rather complex question with a number of structural alternatives, with potential leasing or sale as to which you would need to meet the 20% limitation.

  • Forrest Milder
    June 12, 2019

    One of the fundamentals of the Opportunity Zone incentive relates to the acquisition of the property or business after 2017, in a transaction that involves unrelated parties. So you are essentially correct. The most efficient structure is for you to sell the complex to a new LLC or partnership of which you own not more than 20%, and then go from there. There are likely ample opportunities for you to be paid fees and sales price to get the benefit of the built-in value of the property now and going forward. Of course, you should work with a professional to assure that the fees that you earn are not recharacterized as profit shares that might blow the not-more-than-20% related party test. You could either form a QOF (Qualified Opportunity Fund) to become the investor partner in the LLC that acquires the building you now own (remembering to pay attention to the 20% test) or seek an investment from one of the many, many QOFs that have been formed and are looking for properties in which to invest. And don't forget the potential incidental benefit when you sell the property, you will have a Section 1231 gain that will likely qualify for investment in a QOF (even this one, provided you stay at or below 20%).