Whether gain from a note portfolio sale qualifies for QOF deferral, and lending into the same fund as equity
Consider an investor who sells a seasoned performing note portfolio at a gain and wants that gain deferred into a QOF rather than taxed immediately. Two questions typically need answering before that works. On eligibility, gain from selling notes is generally capital gain and can qualify for QOF deferral. But a portion of what's collected on notes like these is often accrued discount, which is treated as ordinary income, and ordinary income doesn't qualify for QOF deferral the way capital gain does. So even when the proceeds arrive as one wire, part of that number may need to be separated out as ineligible before determining how much can actually go into the fund. On the lender versus equity question, it's possible to place the qualifying gain into the QOF as equity for the deferral and separately originate a construction loan to the underlying QOZB, becoming both equity holder and lender to the same project. The related-party threshold matters here. If the equity stake stays under the relevant related-party percentage, commonly cited around 20% though it's worth confirming which specific test it falls under, the loan can generally stand on its own without unwinding the qualifying property treatment on the equity side. Getting a fund advisor to confirm which test applies before finalizing that structure is worth the extra step.
