A qualified opportunity fund, or QOF, is generally an entity treated as a partnership or corporation for tax purposes – which can include an LLC – formed for the purpose of investing in qualifying opportunity zone businesses or property.
If the PE fund makes the deferral election, it has 180 days from the date of the sale to reinvest funds into a QOF. Alternatively, if a PE fund does not make the deferral election for itself, the partners of the PE fund may do so on a partner-by-partner basis. The partners have 180 days from the date of the realization of the capital gain by the PE fund or from the end of the taxable year of the PE fund, in which to invest their allocable share of the capital gain into a QOF.
This flexibility requires timely communication between the PE fund and the partners to ensure that there is coordination about whether the PE fund or the partners will take advantage of the QOZ program. If a PE fund creates a QOF and seeks to purchase a business which is treated as a C corporation for tax purposes, the QOF cannot simply purchase the stock. A QOF should consider whether to invest only in a single business as opposed to having multiple businesses under the same QOF.
Using a single-business model should make it easier to sell the QOF equity interests to a buyer on exit, but would come at the expense of diversification. PE funds will also need to consider whether their QOF deal will permit or require distributions over time – especially to cover the investors’ deferred income inclusion on Dec. 31, 2026, how to deal with structured or delayed capital raises and what limitations on investor-level QOF disposition rights – such as drag, tag and buy-sell rights – are acceptable to ensure the investors can qualify for the maximum income tax benefits under the QOZ program.
PE funds will need to determine whether such a holding period is consistent with its investment objectives and philosophy, as well as whether to invest in a QOF through the existing PE fund structure or through a separate, standalone structure.