One question we sometimes hear at Realized is: “Do I need a qualified intermediary for my Opportunity Zone investment?” This confusion is understandable. A successful Qualified Opportunity Zone (QOZ) investment requires a knowledgeable Qualified Opportunity Fund (QOF) manager, or sponsor. Meanwhile, the 1031 exchange also requires assistance from a third-party source, known as a qualified intermediary (QI).
While both the QOF sponsor and QI can guide you through the investment process, their roles are not the same, because the QOZ and 1031 exchange programs are not the same. While a QI is required for executing a seamless 1031 exchange of like-kind property, that QI has no role when it comes to facilitating a Qualified Opportunity Zone (QOZ) investment.
Often known as an “accommodator,” the QI upholds a major IRS requirement of a 1031 exchange. Namely, from the moment you begin the process of selling your original property, to the moment you close on the replacement property, you absolutely, positively must not touch the proceeds from any part of the transaction.
In addition to taking charge of funds from the original property’s disposition, the QI also prepares forms and documentation that are necessary to ensure your exchange follows the IRS-stipulated rules and deadlines. As such, the QI must understand the various intricacies, deadlines, and activities associated with your exchange. While you are the one responsible for finding a buyer for your original property, targeting the replacement property, and submitting necessary forms to the IRS, the QI is piloting the entire process.
The IRS and U.S. Treasury are very specific as to who -- or what -- cannot qualify as a QI. For example, you are not allowed to act as your own QI. Nor can family members or same-person partnerships. Anyone acting as your agent within two years ending of the relinquished property’s transfer date (such as an employee, broker, or accountant) also can’t take on the role as your QI.
The good news is that none of the above is required when investing in a Qualified Opportunity Zone.
The above is not to suggest that you don’t need an intermediary for investing in a targeted QOZ. You do. That go-between is the Qualified Opportunity Fund. But, unlike mandated QI requirements of a 1031 exchange, you can actually self-certify your partnership or corporation as a QOF. Doing so requires filing an IRS 8996 form with your federal tax returns, and ensuring that at least 90% of assets you acquire and own are in designated QOZs. Whether you select an outside fund to move your capital gains into a QOZ investment, or form your own fund for that purpose, due diligence and tax knowledge are required. A QI, however, is not.
To conclude, the confusion surrounding 1031 exchanges, Opportunity Zones, and QIs is understandable. What’s important to keep in mind, however, is that both programs’ goals are very different. Still, whether your focus is on an exchange process execution or QOZ investment, due diligence and research are absolutely essential when it comes to finding an experienced Qualified Intermediary or Qualified Opportunity Fund sponsor. Such knowledgeable and skilled entities help ensure that you successfully reach your investment goals and objectives.
For additional information or questions about the Opportunity Zone program or investments, contact Realized Holdings by logging on to www.realized1031.com, or calling 877.797.1031.
There are material risks associated with investing in QOZ properties and real estate securities including liquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and potential loss of the entire investment principal.
Past performance is not a guarantee of future results. Potential cash flow, returns and appreciation are not guaranteed. IRC Section 1031 is a complex tax concept; consult your legal or tax professional regarding the specifics of your particular situation.
This is not a solicitation or an offer to sell any securities. There is no guarantee that the investment objectives of any particular program will be achieved.