Related-party rules in Opportunity Zone deals

A person or entity that bears one of the relationships in §267(b) or §707(b)(1) to another, measured at more than 20% ownership instead of more than 50%.

Section 1400Z-2(e)(2) says persons are related if they are described in §267(b) or §707(b)(1), determined by substituting "20 percent" for "50 percent" each place it appears.¹ Section 267(b) lists relationships such as family members, an individual and a corporation they own, and a grantor and the fiduciary of a trust.² Section 707(b)(1) covers a partnership and a person owning more than the stated share of its capital or profits, and two partnerships owned by the same persons.

"Directly or indirectly" brings in the constructive ownership rules of §267(c): stock or interests owned by an entity are treated as owned proportionately by its owners, and an individual is treated as owning what their family owns.²

In three places: whether the investor's gain is eligible, whether the QOZB's property was acquired by purchase, and how the QOZB's leases are tested.

1. Eligible gain

Under the final regulations, a gain is eligible for deferral only if it does not arise from a sale or exchange with a related person, using the 20% test.^4,5 An investor who sells a building to their own 25%-owned partnership cannot defer that gain in a QOF. See which capital gains qualify.

2. Property acquired by purchase

Qualified opportunity zone business property must be acquired by purchase as defined in §179(d)(2), with the 20% substitution.¹ Treasury's §179 regulation explains that property is not acquired by purchase if it comes from a person whose relationship would disallow losses under §267 or §707(b), from another member of the same controlled group, or with a basis determined by reference to the seller's basis.³

3. Leases

Leased property can come from a related lessor, but the tenant cannot prepay more than 12 months of rent, the terms must be market rate, and leased personal property that is not original use triggers a requirement to acquire equal-value qualifying property.^6,7 Details are in leased property rules.

Yes. An individual is treated as owning what their family owns, and the definition of family depends on which rule is being applied.

Under §267(c)(4), an individual's family includes brothers and sisters, a spouse, ancestors and lineal descendants.² For the purchase rule, §179(d)(2) narrows family to a spouse, ancestors and lineal descendants, which is why Treasury's §179 regulation treats a purchase from a brother or sister as a qualifying purchase while a purchase from a spouse is not.³ Siblings therefore matter for eligible-gain and lease testing but not for the QOZB's purchase test.

Only if the landowner and the QOZB are not related at the 20% level after attribution; otherwise the land is not acquired by purchase.

Illustrative example. Assumptions: two parents own 100% of LandCo LLC, which owns a 300-acre site in a zone. A data center QOF owns 100% of a QOZB that wants to buy the site. Investors in the QOF include the parents (5% combined), their daughter (10%) and their son (8%). Everyone else in the fund is unrelated.

The parents own 100% of LandCo and are treated as owning 23% of the QOF, and through it 23% of the QOZB. Two partnerships owned more than 20% by the same persons are related, so LandCo's sale to the QOZB is not a purchase under §179(d)(2). The land would not be QOZB property.^1,3 Brothers and sisters are not attributed to each other under the purchase rule, but children and parents are.

The general anti-abuse rule in the regulations lets the IRS recast a transaction whose significant purpose is to achieve a result inconsistent with the purposes of §1400Z-2.⁸ Confirm any landowner structure with your tax adviser. Landowner options are covered in Opportunity Zones for landowners.

Yes. Fees and service contracts with affiliates are not barred, but property purchases from affiliates usually fail and every related arrangement must be at market terms.

The requirement that a QOF acquire QOZB stock or partnership interests directly from the business, solely in exchange for cash, is in §1400Z-2(d)(2)(B) and (C).¹ Interests received for services are excluded from qualifying investments under the regulations.^10,11 Fund terms that should disclose these arrangements are covered in fund fees and terms.

Most often with the land, with sponsor-owned equipment and with power or utility affiliates.

• Land: developers often control sites through affiliates. If the affiliate is related at 20% to the QOZB, a sale fails the purchase rule; a market-rate ground lease is the common alternative.
• Equipment: transformers, switchgear and generators bought from an affiliated supplier or a related QOZB may not be acquired by purchase. Buy new equipment from unrelated vendors.
• Power assets: an on-site substation or generation plant owned by a related entity and leased to the QOZB must be at market rent, with no long prepayments.
• Multiple QOZBs: two QOZBs owned by the same QOF are related, so moving equipment from one campus QOZB to another is not a purchase.
• Tenants: a tenant that also invests in the fund at more than 20% raises market-rate and active-business questions on the lease.

Data center budgets are large, so the stakes are too. One misclassified $20 million equipment purchase can move a QOZB's 70% tangible property percentage by several points. See the 70% tangible property test and buying land for an Opportunity Zone data center.

Recent proposed rules add reporting at the QOZB level, which will make transactions between related entities easier for the IRS to see.¹² Those rules are proposed, not final.