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?
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.
Yes, but only the Opportunity Zone portion of the investment will receive the Opportunity Zone tax benefits. Note that Opportunity Zone funds will need to be attentive to how this will affect federal Opportunity Zone compliance and testing requirements. It may also affect the rights of OZ investors vs. non-OZ investors -- for instance, what happens if non-OZ investors want to sell an OZ business before 10 years and OZ investors do not?
Yes. That’s referred to as a mixed fund and only the capital gains funds are entitled to the OZ tax benefits. You have to account for them like two separate investments in the fund.
Yes, they can. The funds are allowed to be co-mingled. However, the funds that are non-capital gains will not be given the beneficial tax treatment and the benefit on the way out will be pro-rata. For example, if you’re 50/50 going in, it will be split up 50/50 going out, with only 50% of the money, the capital gain money, getting the benefit of the program.
Yes, but they would be pro-rated for OZ computations.
Yes, you can invest capital gain and non-capital gain monies into the same fund. Let's call this a mixed investment. It will create significant additional accounting. If you identify to the Opportunity Zone fund manager a mixed investment, the fund manager will be able to calculate your investment as two separate investments. This would be similar to investing both IRA and non-IRA money into a limited partnership. If the fund manager is not notified, the investor will need to allocate all reporting as though it came from two separate investments. This separate accounting will be needed for the initial deferral and separate basis calculations. When the fund sells after 10 years, the portion not from a capital gain would be taxable if there were a gain. The portion of gain originally from a capital gain would tax-free. If there were a death, the portion not from a capital gain would get stepped up in basis to market value of the investment upon death. The portion from the capital gain would not get a step up in basis until 10 years passed. The bottom line is that you should notify the fund manager if any amounts invested are not from a capital gain. The manager is better able to handle the accounting than the investor.
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.
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.
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.
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.
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