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Regarding recycling of distributed capital, what are the rules on investors redeploying cash distributed from one fund into another without recognizing the gain?


Answers
  • Michael Sanders

    Michael Sanders

    Blank Rome
    June 11, 2019

    One OZ fund cannot invest in another OZ fund, but can invest with the existing fund.

  • Brett Siglin

    Brett Siglin

    Jennings Strouss & Salmon
    June 11, 2019

    An investor who sells his interest in a QOF may reinvest the proceeds into another QOF within 180 days without ending their deferral period. However, the 10-year holding period starts over as of the date of the second investment (i.e., there is no tacking).

  • Peter McNeil

    Peter McNeil

    Comprehensive Financial Solutions and Tax
    June 07, 2019

    Depending on the type of entity, there will be different answers. Let's answer for an LLC since it is the most common fund type. Regardless of distributions, income or loss from an LLC will be passed through to the investor. Any capital gain, whether cash was distributed or not, will create the ability to invest that gain into the existing or a separate fund. This will create a deferral against the gain to be reported and start the clock for the other tax benefits, such as to 10-year tax-free rule. A distribution does not create a taxable event unless there is a distribution in excess of the investors basis in the fund. Such a distribution would create a capital gain. The gain would then be eligible for deferral by reinvesting in the fund or investing in another Qualified Opportunity Fund.

  • Erik Kodesch

    Erik Kodesch

    Lane Powell
    June 07, 2019

    The second set of proposed regulations allows the QOF to reinvest proceeds, as long as it is done with 12 months. However, the underlying gain is taxable. I am not sure if the QOF can distribute the funds to the taxpayer for reinvestment. Best to keep the money in the QOF and have it reinvest.

  • Matthew Rappaport

    Matthew Rappaport

    Falcon Rappaport & Berkman
    June 07, 2019

    Pretty simple, really: Any K-1 capital gain from a QOF eligible for deferral could be reinvested into another QOF, but the 10-year clock would restart.

  • David LeGrand

    David LeGrand

    LeGrand Legal
    June 06, 2019

    Sorry, I am not aware of any such provisions. The investment has to be maintained until at least 2025 to get the ferment, reduction of capital gains tax and 10 years for maximum tax exclusion. One one qualified fund can invest in multiple qualified Opportunity Zone businesses, so leaving the money in the fund and structuring new investments into a QBIZ is the strategy I would recommend.

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