Will that create a mixed fund and how is that beneficial?
Normal partnership rules with carryover of basis. I don't think beneficial as it would not be a qualified asset. Yes, this would create a mixed fund. You might consider it worthwhile to aggregate with other assets (and possibly syndication) fully knowing it’s a disqualified asset on contribution.
According to the second set of regulations when the FMV of the property is more than its adjusted basis or the amount of gain to deferred, a mixed fund is created. You will get benefit only related to the amount equivalent to the deferred gain.
Using appreciated property will create a mixed fund, and it's only beneficial if the appreciated property is the only funding mechanism available. You typically want to avoid a mixed fund whenever you can.
Contributing an asset to a QOF to cover the qualified gain on the sale of another asset is allowable under the tranche II regulations. This is an effective strategy if the investors are dealing with the related party rules since an asset contribution negates the related party rules. The rules get a little tricky but only the taxpayer’s tax basis in the contributed property is eligible for OZ reinvestment benefits and any appreciation to n the asset will create a mixed fund. The percentage of the fund that represents the non-qualified OZ investments gets no step up or exemption. Therefore, ideally the contributed property should not be highly appreciated, but as mentioned, avoiding the related party rules may more than offset the mixed fund issue.
A mixed-fund will result if a taxpayer contributes to a QOF in a nonrecognition transaction property that has a fair value in excess of the property’s adjusted basis. The excess of fair value over adjusted basis is treated as an investment not eligible for a basis step-up if held for at least 10 years. (Not beneficial). Furthermore, the tracking of basis for a mixed-fund raises considerable complexity. (Also not beneficial.)
When using appreciated property, only the basis is qualified for OZ benefits and the appreciation generates a mixed-use investment. For example, if you have $1 million of gain and you fund a QOF investment with appreciation property ($1.5 million fair market value on a $900,000 basis), you are treated as making a mixed-fund investment as if you rolled $900,000 of gain and separately invested $600,000 that was not from gain.
The same rules that apply to funding appreciated property to any LLC or other entity would apply. The basis would be your tax basis only not the appreciated basis. The further problem with contributing appreciated property to a fund would be that the property contributed is not a capital gain. Therefore, no deferral of capital gains would apply and the interest in the fund will not get the 10-year tax-free treatment. Selling to the fund and contributing the capital gain portion would be the better option. Even this option could have problems with violating the related party rules. There are multiple options such as leasing the property. It's best if you contact a tax professional for guidance for your unique situation.
DISCLAIMER:the information found on this website is intended to be general information; it is not legal or financial advice. Specific legal or financial advice can only be given by a licensed professional with full knowledge of all the facts and circumstances of your particular situation. You should seek consultation with legal and financial experts prior to participating in any aspect relating to Opportunity Zones. Posting a question on this website does not create an attorney-client relationship. All questions you post will be available to the public; do not include confidential information in your question.