Thread by @DallasAptGP

I discussed “Personal OZ Funds” a few days ago

The correct terminology is “Captive QOF”. A captive QOF is one that is formed, funded, and managed by the investor.

Thread below on why I think investors should take advantage and GP’s should be setup to take money from QOF’s
1/14

A QOF has compliance requirements to keep tax benefits. Failing to satisfy these requirements at any point could result in penalties ranging from nominal interest charge at the low end to a complete loss of the exclusion from tax on the gain resulting from the sale.
2/14

Being in control of your own captive QOF reduces compliance risk and puts you in control. Invest in OZ real estate directly or into QOZB’s from 3rd party sponsors.

Main rules: make sure the money is placed into OZ assets within 180 days and that 90%+ remains there.
3/14

The bigger benefit from having a captive QOF comes from using cashflow & refi (even sale) proceeds to reinvest in other QOZB's.
4/14

The OZ regs basically require Real Estate deals to be development or heavy value add. These deals naturally setup for a cashout refinance at some point in year 2-4.

There are likely to be some nice sized distributions...don't you want them to keep the OZ benefits?
5/14

If you invest through GP’s QOF then the money will likely be sent back to you personally and OZ benefits are lost on the distributions.

If you invest through captive QOF into GP’s QOZB then the money will be sent back to your QOF and remain tax advantaged.
6/14

Sometimes OZ deals sell prior to 10 yrs. I know someone who invested in an OZ MF development deal in early 2020.

$34mm total size ($24mm debt/$10mm equity).

GP blew off the OZ benefits and sold for $82mm. Windfall profit which is nice!

What happens here regarding OZ?
7/14

If this person had invested through GP’s QOF then he would owe taxes on original OZ investment (deferral would end) and owe taxes on the gain from building sale. The OZ investment would be totally over.
8/14

However, he invested through a captive QOF into GP’s QOZB.

**Original deferral remains
**Owed tax on the windfall profit but has 1 yr to put the $$ back to work in QOZ assets
**OZ investing continues and if his QOF goes past 2030 he’ll get a basis step-up to market value

9/14

If/When you get $$ back into a captive QOF you are in a great position:

**Choose to distribute to yourself personally without penalty (if desired)
**Find new QOZB investments and keep compounding!

Make sure that 90% of the assets are in OZ property for semi-annual testing
10/14

Why is there a focus on growing the QOF?

If you hold the QOF for 10+ years then you get to step up the tax basis of everything in it to market value. EVEN THE NEW PROPERTY ACQUIRED IN YEARS 2-9
11/14

Using refi, sale, and cashflow proceeds to get your QOF invested in more QOZB deals is amplifying the tax benefits.

The step up to market value in year 10 doesn't only allow you to avoid capital gains taxes. It also allows you to avoid depreciation recapture
12/14

With cost seg and bonus depreciation there are scenarios where you end up with depreciation write-offs significantly more valuable than your original OZ investment.

You don't have to recapture the depreciation if you hold for 10 years and follow the rules
13/14

I will continue to encourage LP's to start their own captive QOF's because I believe in the tax benefits.

I will also continue to encourage GP's to raise money through QOZB's rather than QOF's.
14/14

Give me a follow at @DallasAptGP if you enjoy this content.

I am wearing my RE Operator hat half the time and my OZ investor hat the other half. I love brainstorming on this stuff and want to get more people engaged.