JOURNAL OF TAX CREDITSWritten by Glenn Graff, Published by Novogradac & Company LLP, Journal of Tax Credits, April 2019, Volume X, Issue IV
The opportunity zones (OZ) incentive and the low-income housing tax credit (LIHTC) both have significant potential to create benefits. This article provides a brief overview of some of the issues and opportunities when combining newly created OZ incentive with the LIHTC. Some familiarity with the OZ incentive is assumed.
QOZ-LIHTC Structure
The organizational structure of an OZ-LIHTC transaction is similar to a LIHTC-only transaction. The OZ-LIHTC investor would invest in a corporate or partnership fund that qualifies as a QOF. That QOF would be the LIHTC limited partner in a partnership (operating partnership) that meets certain requirements to be qualified OZ business and owns a LIHTC building that meets certain OZ requirements. Note that under OZ rules, funds or partnerships cannot be members of the QOF; the actual entities deferring the capital gains must be members of the QOF and those entities will receive both the LIHTCs and OZ benefits.
Top OZ-LIHTC Issues and Opportunities
- Pick the right LIHTC developments--new construction or very substantial rehabilitations with significant debt.
- Treatment of significant related party fees is unclear.
- Investors may benefit even without expected future appreciation.
- Investors need capital gains or exit taxes to get any OZ benefits.
- Single asset funds are currently preferred.
- Developers can also benefit from OZ investments
- Invest in transactions with debt to take advantage of tax losses.
- Capital contribution timing issues.
- Monitor the QOF 90 percent test.
