Investing and lending are separate concepts. If there is a loan interest is fine and is operating income
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If someone invests into a fund as a loan to the investor, is the interest they make on the loan taxed?
How often does it get paid or does it stay in the fund until it is cashed out in 10 years?
Answers
Opportunity Zone benefits are only available for equity investments of recently realized capital gains. Loans to a QOF or on property owned by a QOF aren’t affected by the OZ rules, so the loan repayment terms are whatever the lender/borrower agree to and loan interest receives standard tax treatment.
A loan is not an investment in the fund. The loan get no special tax benefit. It is just like any other loan and the interest would be income to the lender and an expense to the lendor.
If the party is making a loan to the fund, it's a loan and not an investment. Yes, interest taxable when paid if a cash basis lender or when accrued if an accrual basis lender. Preferred equity structures may be of interest if you seek an engagement.
To qualify for QOZ tax benefits, you must invest equity and not extend a loan. While extending a loan to the QOF is not disallowed, such an investment is not eligible for QOZ tax benefits, and interest is subject to regular tax consequences (i.e., it is ordinary income).
I'm sorry, but this question needs clarification. The words "If someone invests into a fund as a loan to the investor" are inconsistent with how the incentive works. First, an investor in a Qualified Opportunity Fund must make an equity investment, not a loan. Second, your reference to someone "investing" and then using the words "to the investor" in the same sentence makes this sound like an investor is lending money to him or herself. I expect that this is simply an error in how you wrote the question, but I'm not sure. Third, if you are talking about a Qualified Opportunity Fund making a loan as one of IT'S investments, then I note there are only very limited circumstances and amounts for which a fund can make loans. For the first six months after a fund receives capital contributions, it can advance short-term loans (up to 18 months), but after that, they become "bad" property that could not count towards the 90% test. In particular, in almost all cases, the fund must either buy tangible OZ business property or make equity investments in partnerships, LLCs, or corporations that are engaged in (or building) OZ businesses.
You cannot invest in a zone as a loan and have it qualify for the benefits.
The question is not very clear. An investor in a QOF must invest equity. Loans do not qualify as investment.
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