Written 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.
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.