--Q&A in-process--
A1. The decision to invest exclusively in California property despite the apparent disadvantage was made because ST’s owner-operator, a born-and-bred Californian who has spent his entire 27-year legal career in Northern California, knows the Golden State well, is well-connected here, and expects his investor pool to consist primarily of Californians who, under the "resident rule", would receive no benefit by making a QOZ investment in states that follow the Federal QOZ's rules.1 Additionally, the less-attractive tax rules of California for out-of-state QOZ investors means that competition for properties in California QOZ's should be reduced.
1 California-resident investors will be taxed on their capital gain regardless of property-location.
A2. Up to the amount of investment made in the fund realized within the applicable time period preceding the investment (e.g., $1 million capital gains realized in the 180-day period preceding the date of investment can be fully deferred by an investment of at least $1 million).
A3. The “forgiveness” of capital gain is shorthand for what is actually an increase, or “step up”, in the taxpayer’s tax basis in the investment, which has the same net effect as being forgiven by the IRS of any obligation to pay taxes on such income.
A4. Though not a QOF qualification requirement, in order to align with the QOZ 2.0 tax benefits, the Fund will have a minimum term of 10 years from the contribution date of the last investment into the Fund. Subject to securities law restrictions and restrictions on the admission of new members into the Fund, investors will be entitled to sell their shares in the Fund at will but will have no guaranteed redemption or buy-out. After the 10-year term, the Fund will likely sell the underlying real estate, distribute the net sales proceeds to the Fund members, and dissolve the Fund.
A5. Naturally, ST intends to generate compensation and wealth for itself from these Funds. To be frank and transparent, ST’s owner-operator considered QOZ 2.0 as an opportunity (no pun intended) that looked better and better as he looked into it more and more. He sees it as a way to leverage his experience and skills built up over decades into a viable investment vehicle from which he could receive industry-standard sponsor and management fees and perhaps also receive an investment share.
A6. Unfortunately, no, simply due to the inability to do so; if that circumstance changes, the owner-operator will certainly invest in order to demonstrate his own confidence in the investment.
A9. The way the 3 major capital gain tax breaks, offered to QOZ 2.0 investor-taxpayers, work in practice is demonstrated in this infographic.
A8. Very much so. ST's owner has seen enough episodes of American Greed to realize that if he were an investor he would be very skeptical of anyone handing his investment. In all seriousness, ST prizes any investor who puts their faith in it, and is more than willing to provide as much transparency as is reasonably possible to Fund investors.
A9. The public policy goal of the QOZ program is to encourage investment into low-income communities by rewarding taxpayers who make such investments with capital gains tax breaks, as discussed in this "one-pager". The challenge lies in the fact that the taxpayer must meet a complex set of criteria, coupled with the fact that low-income communities tend to be less attractive areas in which to invest. However, it is ST's opinion that these challenges can be used as advantages -- because to those able and willing to navigate the complexities of the tax rules and to mine the low-income areas for strong investments, they create a barrier to entry and disincentive to potential competitors.