Or is it only to the extent of the equity you have in a deal?
An investor in a QOF generally can receive a debt-financed distribution from a QOF, so long as (i) the amount of the distribution doesn't exceed his or her tax basis in the QOF interest, which will be increased by the investor's allocable share of such debt, and (ii) the distribution occurs at least two years after the date that the investor acquires his or her QOF interest (so that the so-called "disguised sale" rules don't apply).
There is a two-year presumption for cash-out refinances in OZ investments. If you cash out within two years of equity coming into a QOF, it'll be considered a return of zero-basis capital, meaning a capital gain will be recognized unless the taxpayer can defeat the presumption. Wait longer than two years and the presumption shifts to the taxpayer's favor, so you're not out of the woods, but you're in better shape. The best approach is tying the cash-out refinance to stabilization of the property, which typically takes two-plus years in real-estate development or renovation deals.
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