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How do carried interests qualify for Opportunity Zone tax benefits?


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  • Brett Siglin
    June 11, 2019

    If an investor has a "carried interest" (or “promoted” equity), only the portion attributable to his capital contribution is eligible for exclusion from capital gains after a 10-year hold Example: If an individual managing member of a QOF contributes 10% of the capital to the QOF and also receives 20% of the profits above a specified internal rate of return, plus the 10% pro-rata participation with other capital investors, his 10% pro-rata participation would be eligible for capital gains exclusion, but his 20% promoted interest would not. Sponsors/developers will need to classify which portion of their interests in a QOF is being issued in exchange for services (such as a development fee and management fees) and treat those as non-qualifying investments.

  • Peter McNeil
    June 07, 2019

    Gains from a carried interest are not eligible to receive the tax benefits of investing in a Qualified Opportunity Fund. If these gains are invested, they will not receive any tax benefits. This was clarified in the regulations released in April of 2019.

  • Shawn Neidorf
    June 06, 2019

    Sorry, that's one for a lawyer, which I am not. There is language in the second tranche of guidance that talks about how services cannot count as investments for OZ tax purposes. But for details, you'll need a tax lawyer.

  • Debbie Klis
    June 06, 2019

    The new regulations issued by Treasury in April 2019 confirm that carried interests issued by a Qualified Opportunity Fund (QOF) do not qualify for Qualified Opportunity Zone (QOZ) benefits. Thus, where a person receives an interest in a QOF in exchange for services rendered to the QOF or to an entity in which the QOF holds any direct or indirect equity interest, the proposed regulations provide that the portion of such person’s QOF interest received in exchange for such services is not treated as a qualifying investment. A profits interest in a QOF received in exchange for services (a “carried interest”) is not eligible for QOZ benefits. In addition, a capital interest acquired in exchange for such services is also ineligible for QOZ benefits. Only the investment of eligible gain gives rise to QOZ benefits. QOF sponsors may be permitted to benefit from an FMV basis election made by an upper-tier partnership in which the QOF sponsor holds a carried interest, to the extent that such partnership holds qualifying investments in a QOF for more than 10 years and, through such election, eliminates gain that is allocable to the sponsor.

  • Brad Cohen
    June 06, 2019

    They don’t if issued for services.