Opportunity Zone Investing: How is Debt Handled in Determining the Basis Step-up After 10 Years?

Investors in qualified opportunity zone partnerships are concerned about how their investment will be valued after 10 years when they can sell the asset or elect a basis step-up to “fair market value.” Forrest Milder of Nixon Peabody walks through the computation when the investment is partially financed with non-recourse debt.

Bloomberg recently published a great article on how debt should be handled when calculating the step up basis of an Opportunity Zone investment. The article was written by Forrest David Milder, a partner in the law firm, Nixon Peabody, LLP specializing in the tax aspects of tax-equity investing.

Here’s a snippet:

Treasury Regulation Section 1.1400Z2(c)-1(b)(2) provides a “special election rule” for QOF partnerships, stating that when making the post-10 year election, “the basis of the partnership interest is adjusted to an amount equal to the fair market value of the interest, including debt.” The subsection also provides a step-up “calculated in a manner similar to a section 743(b) adjustment” for sales of QOF partnership assets. So, we should get the same result when the QOF sells its assets.

Similarly, the analysis is also consistent with tax code Section 7701(g). It provides that “For purposes of subtitle A [the income tax provisions], in determining the amount of gain or loss (or deemed gain or loss) with respect to any property, the fair market value of such property shall be treated as being not less than the amount of any nonrecourse indebtedness to which such property is subject.” Plainly, this provision is using the gross value method of determining the fair market value of a property subject to debt.

You can read the full article below.

Source: news.bloombergtax.com