I don’t believe so. I would check with your accountant, though.
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Is there any way for a current business located in a OZ to transfer assets in-kind (via taxable sale) to a QOF in exchange for an interest, while also getting deferral on the gain from that sale?
The proposed Regulations 1.400Z2(a)-1(b)(2)(iv) seems to suggest this gain is not eligible for deferral. Is there any practical away around this?
Answers
Yes. A long as the seller's interest in the fund after the sale is not more than 20%.
That is more of a question for a good tax attorney.
Not without an investment in new property akin to starting a new business. Ultimately, the purpose of the regime is to encourage new investments that create new jobs. If a business already exists in the zone, an incentive was not needed to create it.
While a full analysis is not available without a detailed review of the proposed transaction and all relevant factors, it is likely that the proposed transaction would not qualify for deferral.
You are correct. The regulations generally prevent using a gain on a related party sale as an OZ-eligible gain. Also, since the assets were previously used in an OZ census tract, the purchase will not qualify the QOF as a qualified first user without something significant (100% basis increase on each asset). The potential work-around would be to lease the assets to the QOF, but if the old owners will own 20% or more of the QOF, then another related party applies under the lease provisions and the QOF would need to purchase other new equipment to be used in the OZ. It is more difficult to qualify an existing OZ business vs. starting a new business or moving a business you purchase into an OZ census tract.
The prevailing thought is that if the assets get sold for cash, and the cash is funneled back into the purchasing QOF for less than a 20% equity interest, that seems to be a viable workaround. No guarantees, though.
The restriction is that the gain cannot be realized in a transaction with a related person. The ownership percentage to determine "related party" is reduced to 20%.
I think there are a great many variables in this question that could change the answer. Possibly if the business didn't own 20% or more of the QOF, it could sell property to a QOF. More specifics would be helpful.
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