CaseMark Structuring Opportunity Zone Funds
Designs Qualified Opportunity Zone fund structures compliant with IRC §1400Z-2 and Treasury Regulations, covering entity formation, 90% asset test compliance, investment timelines, substantial improvement requirements, and tax deferral/exclusion mechanics.
When To Use
- Forming a new Qualified Opportunity Fund (QOF) or Qualified Opportunity Zone Business (QOZB)
- Evaluating whether a proposed investment qualifies for OZ tax benefits
- Structuring capital gains rollovers into a QOF within the 180-day window
- Analyzing whether a real estate project meets the substantial improvement test
- Designing fund terms (PPM, LP/LLC agreement) around OZ-specific holding period and compliance constraints
- Advising on exit timing to maximize basis step-up and gain exclusion benefits
Inputs To Gather
- Capital gains source: Type of gain (short-term, long-term, §1231), recognition event date, and 180-day deadline calculation
- Investor profile: Number of investors, tax status (individual, partnership, corporation, trust), state residency for state OZ conformity analysis
- Target investment: Asset class (real estate, operating business, mixed), geographic location (confirm census tract designation as a Qualified Opportunity Zone) [VERIFY census tract status — designations can expire or be updated]
- Entity structure preferences: Single-asset vs. multi-asset fund, LP vs. LLC, blocker entities for tax-exempt or foreign investors
- Project budget and timeline: Total project cost, acquisition cost of existing structures (for substantial improvement basis calculation), projected construction/renovation schedule
- Intended hold period: 5-year, 7-year, or 10-year horizon and desired tax benefit tier
- State OZ incentives: Whether the fund's state(s) offer conforming or additional OZ tax benefits [VERIFY — state conformity varies significantly]
Workflow
Confirm OZ Eligibility
- Verify the target property/business is located in a designated Qualified Opportunity Zone census tract
- Confirm the investor's capital gain qualifies as an "eligible gain" under §1400Z-2(a)
- Calculate the 180-day investment deadline (note: for partnership gains, the 180-day window may start at partnership year-end or gain recognition date — investor elects) [VERIFY current IRS guidance on 180-day start date for pass-through entities]
Select Entity Structure
- QOF must be organized as a corporation or partnership (including LLC taxed as either) and self-certify on Form 8996
- Determine single-tier (QOF holds assets directly) vs. two-tier (QOF invests in a QOZB subsidiary) structure
- Two-tier is typical for operating businesses; single-tier is common for direct real estate holds
- Address blocker entity needs for tax-exempt investors (UBTI concerns) or foreign investors (FIRPTA, ECI)
Design Compliance Framework
- 90% Asset Test: At least 90% of QOF assets must be Qualified Opportunity Zone Property, tested semi-annually (June 30 and December 31). Penalty for failure: amount of shortfall × federal short-term rate × underpayment penalty rate
- Substantial Improvement Test (for existing buildings): QOF/QOZB must double the adjusted basis of the building (excluding land) within any 30-month period beginning after acquisition. Land value is excluded from the test basis
- 70% Tangible Property Test (QOZB level): At least 70% of QOZB tangible property must be QOZP
- Working Capital Safe Harbor: QOZB can hold working capital for up to 31 months if there is a written plan, schedule, and the capital is designated for OZ property acquisition, construction, or development [VERIFY — COVID extensions may have modified safe harbor timelines]
Map Tax Benefit Timeline
- Deferral: Eligible capital gain invested in QOF is deferred until the earlier of (a) the date the QOF investment is sold or (b) December 31, 2026 [VERIFY — the 2026 inclusion date under current law]
- Basis Step-Up (5 years): 10% basis increase in deferred gain after 5-year hold (effectively excludes 10% of deferred gain) — note: this benefit expired for most investors as of December 31, 2026 recognition date [VERIFY whether legislative extensions have been enacted]
- Basis Step-Up (7 years): Additional 5% (total 15%) after 7-year hold — same expiration concern
- 10-Year Exclusion: If QOF investment held for at least 10 years, investor may elect to step up basis in QOF interest to fair market value, permanently excluding post-investment appreciation from tax
Draft Fund Documents with OZ Provisions
- Operating/partnership agreement: include OZ-specific transfer restrictions (to protect holding periods), compliance covenants, mandatory reporting obligations, capital call mechanics aligned with 180-day deadlines
- PPM/subscription agreement: OZ risk factors, 90% test compliance risk, legislative change risk, illiquidity due to holding period requirements
- Side letter considerations: different 180-day deadlines per investor, co-investment rights, reporting frequency
Model Economics and Reporting
- Prepare pro forma showing after-tax returns at 5-year, 7-year, and 10-year exits compared to non-OZ investment
- Identify annual Form 8996 filing requirements for the QOF
- Map investor-level reporting: Schedule K-1 with OZ gain deferral tracking, basis adjustments
Output
- QOF Structure Memorandum: Entity diagram, tier structure rationale, compliance framework, and tax benefit timeline
- 90% Asset Test Compliance Calendar: Semi-annual testing dates with asset valuation procedures and cure period deadlines
- Substantial Improvement Analysis (if applicable): Basis calculation, 30-month improvement schedule, budget allocation between land and building
- Investor Tax Benefit Summary: Table showing deferral amount, basis step-up milestones, and 10-year exclusion eligibility per investor class
- Risk and Compliance Matrix: Key compliance triggers, penalty calculations for asset test failures, and legislative risk factors
Quality Checks
- Confirm census tract designation is active and has not expired [VERIFY]
- Validate that 180-day deadlines are correctly calculated for each investor's specific gain recognition event
- Verify substantial improvement math excludes land basis and uses post-acquisition adjusted basis of improvements
- Ensure 90% asset test accounts for all QOF assets, including cash and working capital (apply safe harbor where documented)
- Cross-check that fund documents contain transfer restrictions sufficient to protect OZ holding periods
- Confirm state-level OZ conformity — many states decouple from federal OZ provisions or impose additional requirements [VERIFY per applicable state]
- Flag any investor whose 5-year or 7-year hold period cannot be achieved before the December 31, 2026 deferred gain recognition date [VERIFY current statutory deadline]
- Review for UBTI exposure if tax-exempt investors participate, and FIRPTA/ECI exposure for foreign investors