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Can you contribute a note payable instead of cash to an QOF?

Could those funds count towards the 90% test via the working capital exception?


Answers
  • Samuel Weiser
    June 29, 2019

    I think your question is can you fund your QOF contribution with cash and a note paying off the note overtime to complete the contribution. Further, I think you want to know if the portion of the contribution that is a note qualifies for the working capital exception. First, you have to contribute cash to your QOF equal to the amount of the gain you're deferring. The amount of the note does not qualify as a QOF investment. If the note represents amounts you consider future gain deferrals paying off the note as the gains are realized, there are structuring options but they are more complex than I can explain here. Second, only assets contributed to a Qualified Opportunity Zone Business or a Qualified Opportunity Zone Property are eligible for the 31-month working capital exception. Moreover, the 90% test and the working capital exception are generally unrelated tests. 90% of the QOF assets must be invested in a QOZB or QOZP generally within 180 days of the contribution to the QOF. The working capital exception relates to the assets held by the QOZB or QOZP that have been downstreamed from the QOF entity.

  • Matthew Rappaport
    July 24, 2019

    Probably not. Notes payable will not get you credit for tax deferral unless and until they're funded within the 180-day window.

  • Scott McIntosh
    June 29, 2019

    In order to qualify for the OZ tax benefits, deferred capital gains need to be placed in the QOF account no later than 180 days after they are realized. A note payable could not be used in place of cash, though OZ funds (and/or the lower-tier OZ businesses) can also use debt to fund the purchase of Qualified Opportunity Zone property. The 90% asset test is at the fund level, while the working capital exception applies to Qualified Opportunity Zone businesses. I think there may be some confusion in this question about how the rules apply to first- and second-tier entities.

  • Blake Christian
    June 29, 2019

    A note will generally not qualify as a qualified OZ business asset.

  • Michael Kosnitzky
    June 30, 2019

    As to the first question, nothing in the proposed regulations specifically addresses the concept of a contribution of a note payable to a QOF. However, because such a note is not cash, it should fall into the general rules associated with the contribution of non-cash assets to a QOF. If the taxpayer contributes his/her own note payable to a QOF (I am assuming for this purpose that the note is not readily tradeable on a public securities market, although that may not make a difference here), the amount of the investment (which correspond