How Do I Invest In An Opportunity Zone Fund


Who Should Invest In An Opportunity Zone Fund And Why

How To Invest In Opportunity Zones | Group Investing In Opportunity Zone Funds

Investors with large capital gains who do not need the money immediately would benefit from investing in an Opportunity Fund more often than not. Unless the capital earnings are needed for another purpose within the next few years, investors will find a drastic reduction in the amount of taxes they need to pay on these earnings.

Additionally, investors will have more money to invest upfront if they utilize an Opportunity Fund.

Imagine this: A man earns $1.5 mil on an investment and will need to pay $300k in taxes on this growth. If he pays taxes on the capital gains, he will only be able to invest $1.2 milion however, if he immediately invests in an Opportunity Fund, he will be able to invest the entire $1.5 million.

This gives the investor even more money to work with, which does two things: first, ensures that the investor is compounding her returns on a larger sum and second, it further stimulates the economy with an additional $300,000.

Your Cash May Be Tied Up For A Long Time

To optimize the capital gains tax break, Opportunity Zone investors should count on their money being tied up for 10 years. Funds need that time to collect and disseminate cash, choose the appropriate potential properties for investment,, and conduct the actual remodeling or upgrades needed to turn those properties into profitable enterprises. Thus, lock-up timetables can go on for a decade or longer.

The Federal Opportunity Zones Program Allows Investors To Defer Or Reduce Capital Gains Taxes

Initiated as a result of the Tax Cuts and Jobs Act of 2017, the Opportunity Zones program offers some of the strongest federal tax incentives of any government program in recent history. By investing in a Qualified Opportunity Zone, one of 8,700 census tracts across the United States that have been certified by the U.S. Treasury Department as extremely economically disadvantaged, investors can receive incredible tax benefits, including being permitted to defer their capital gains taxes until December 31st, 2026. They will not typically need to pay these taxes until April 2027.

In addition:

  • Opportunity Zone investments held for at least 5 years before December 31, 2026 will experience a 10% reduction in their capital gains tax basis.

  • Investments held for at least 7 years before the same date will experience an additional 5% reduction in their capital gains tax basis, for an overall 15% reduction.

These benefits apply equally to short-term and long-term capital gains, as well as 1231 gains . In addition, investors pay no taxes on capital gains acquired after their money has been invested, provided they keep the money in for at least 10 years. Investors can keep their funds invested until 2047, giving them nearly three decades during which their funds can increase without any additional capital gains tax burden.

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More On How To Invest In A Qualified Opportunity Fund

If you would like to pursue an investment in a qualified opportunity zone and setup a qualified opportunity fund, please contact one of our tax professionals at Aldrich. Our industry experts will be able to help you create the fund and ensure you are in compliance with this new and exciting opportunity.

What Is A Qualified Opportunity Fund

The Federal Opportunity Zones Program and Its Implications ...

In 2017, the Tax Cuts and Jobs Act established a new tax perk allowing investors to defer and minimize capital gains taxes when reinvesting capital gains into qualified opportunity zones, which are economically depressed regions within the U.S. Qualified opportunity funds invest in businesses or properties within qualified opportunity zones, offering that preferential tax treatment to the fund investors.

On the other hand, the White House Council of Economic Advisors assessed the initial impact of qualified opportunity zone tax breaks in August 2020. It found that by year-end 2019, qualified opportunity funds raised $75 billion in private investment, which CEA projections show could shift 1 million people from poverty to self-sufficiency, reducing poverty in opportunity zones by 11% percent.

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Where To Find Opportunity Zones

As mentioned, opportunity zones exist throughout the entire country, including Washington DC. Investors can check the list at the US Department of the Treasury website, which regularly updates the opportunity zones collection.

All opportunity zones are identified by their state, home county, and the census tract number used to originally identify them. Investors can also use the US Census Bureaus Geocoder to determine which census tract number matches a specific address. For instance, Alabamas Autauga County is designated as a low-income community. It has a census tract number of 1001020700.

How To Start A Qualified Opportunity Fund

Because creating any type of hedge fund is extremely complicated and expensive, only experienced and active real estate investors should attempt to start their own qualified opportunity funds. However, any company ranging from a partnership to a corporation can become a qualified opportunity fund by filing IRS Form 8996. To do this, the company must file the form for every taxable year it wants to maintain its QOF designation. The fund will also need a management team to ensure that investments are placed in the right areas and that they are held for enough time to benefit from the IRS tax breaks. All QOFs must meet a minimum 90% investment standard within qualified opportunity zone properties.

Furthermore, investment assets must already be established as operating businesses or properties inside an opportunity zone. If the property is not developed or has been abandoned, significant improvements have to be made to the property within 30 days of acquisition, or your QOF may be penalized. The IRS assesses the investment standards for qualified opportunity funds every six months.

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How Communities Can Engage*

Local leaders and stakeholders play a crucial role in guiding Opportunity Zone investments in their communities. Often, an Opportunity Zone strategy can be melded into a communitys existing long range planning and development goals. WHEDA frequently presents at summits, workshops, and conferences across the state on how communities can leverage the Opportunity Zone Initiative.

Investing In Opportunity Zones For Beginners

How to Invest in Opportunity Zones

An Opportunity Zone is an economically distressed U.S. community where investments can be eligible for preferential tax treatment. The federal government created qualified Opportunity Zones as a part of the Tax Cuts and Jobs Act of 2017 to encourage investment in these areas and spur economic development.

Because of the tax advantages offered in Opportunity Zones, they represent an attractive investment option. Learn some of the advantages of investing in Opportunity Zones, some barriers and risks to be aware of, and how you can get started.

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Is There An Expiration Date

Yes. The tax benefits expire Dec. 31, 2026, and no gain deferrals will be available after this date. This means, in order to maximize tax benefits, you must make your Qualified Opportunity Fund investment by Dec. 31, 2019. Doing so will allow seven full years to elapse, granting you a 15% step-up in basis, before the tax benefits expire.

The new regulations add more flexibility by allowing the QOF to hold these funds for up to 30-months as long as an investment plan for these funds exists.

They also state that taxpayers are still able to exclude gain from their eligible Opportunity Fund investment as long as it’s sold prior to Dec. 31, 2047.

The Bottom Line For Real Estate Investment In Opportunity Zones

Qualified Opportunity Zones give real estate investors a new way to defer and potentially eliminate tax on capital gains. There are 8,700 Opportunity Zones in every state in the U.S. and its territories including Puerto Rico and the Virgin Islands.

Qualified Opportunity Funds or QOFs are the designated investment vehicle used to invest in Opportunity Zones. QOFs can be corporations or partnerships and need to invest at least 90% of their holdings in one or more Opportunity Zones.

Capital gains that are generated from any asset sale such as real estate, stocks and bonds, Bitcoin, and art can be invested in QOFs. After five years the taxable capital gain is reduced by 10%, and after seven years the capital gain is reduced by another 5%.

After nine years, tax on the reduced capital gain amount must be paid. Best of all, any appreciation on the capital gains invested in a QOF is completely tax free!

Like any new government program there are always details to be worked out. But one thing is for certain: Opportunity Zones offer real estate investors a great way to defer existing and permanently eliminate new capital gains while investing in underserved communities across America.

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Is Investing In An Opportunity Zone Fund Right For You

Compared to many other investment vehicles, QOFs offer many tax benefits with few restrictions. Theyre best for you if:

  • Youre a passive investor looking to diversify your portfolio through professionally managed funds to minimize the time and effort you have to spend on managing the assets.
  • You have capital gains from one or more appreciated assets and want the convenience of rolling all the profits into one investment vehicle while deferring and eliminating tax burdens.
  • You want to retain access to the initial principal.
  • You have a medium-term time horizon and want access to the capital gains from the original investment in a few years while paying a reduced capital gains tax.

How To Start Investing In Qualified Opportunity Funds

Opportunity and Promise Zones Benefit from Build Fund ...

In order to make sure youre following the rules, considering all potential implications and filing the appropriate paperwork, consulting with tax or financial advisors well-versed in qualified opportunity funds can help smooth the investment process.

Whether an investor is eligible to use opportunity zones depends on the character of the gain and timing of that gain, Homan says.

She recommends that investors who are interested in qualified opportunity funds and have gains start out by talking with their accountant. Thats really your first step to become equipped and know this is the timing Im working with, this is the amount of capital I have, and then your next step is looking at your options in the marketplace.

Despite needing to jump through some hoops, opportunity zone investments are compelling.

For investors, there are a number of funds to evaluate, and you can also look at investing in individual deals. This is a really active marketplace and one of the most significant tax incentives in a generation. Its going to do a whole lot of good, Homan says.

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How Do I Invest In Opportunity Zones

The ideal opportunity zone investment starts with capital gains realized from a previous, recent asset sale.

Normally, capital gains like this trigger a tax event in the year they are earned. To leverage opportunity zones and avoid paying capital gains tax, an investor must put the gains into a QOF within 180 days of selling the asset. Take note: there are no extensions in the case of holidays or weekends. When timing a QOF investment, keep this in mind.

A QOF investment should support a business or renovate business buildings in an opportunity zone. At least 70% of tangible property owned or leased in a QOF must be qualified opportunity zone business property.

Certain sin businesses cannot be financed with a QOF. These include:

  • golf courses

What Qualifies As An Opportunity Zone

An opportunity zone can potentially exist in any neighborhood that has been economically depressed for an extended period of time. The governor of every state can nominate any historically disadvantaged area in their state to be designated as an opportunity zone.

The federal government reviews the nomination and if its approved, the area will become an opportunity zone. The opportunity zone designation encourages people to make significant investments in the zone such as buying real estate or opening businesses by offering tax incentives and other benefits to investors and business owners.

The U.S. Department of Housing and Urban Development has an opportunity zone map on its website. If youd like to know what eligible census tracts contain opportunity zones in your state, or anywhere else in the U.S., this is a great place to start your research.

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The Opportunity Zone Program In New York State

New York State is participating in the new Opportunity Zone community development program, offered through the Tax Cuts and Job Acts of 2017. The federal program encourages private investment in low-income urban and rural communities. Based on analyses by Empire State Development , New York State Homes and Community Renewal , New York State Department of State and the states Regional Economic Development Councils , New York State has recommended 514 census tracts to the U.S. Department of the Treasury for designation as Opportunity Zones.

to view the list of the 514 approved and designated tracts.

Use the map below to view approved and designated tracts:

Q: What is an Opportunity Zone?A: An Opportunity Zone is a low-income census tract with an individual poverty rate of at least 20 percent and median family income no greater than 80 percent of the area median.

Q: What is the benefit of an Opportunity Zone?A: An Opportunity Zone can receive funds from Opportunity Funds. Opportunity Funds provide investors the chance to put that money to work rebuilding the low to moderate income communities. The fund model will enable a broad array of investors to pool their resources in Opportunity Zones, increasing the scale of investments going to underserved areas.

Q: How many Opportunity Zones may a state nominate?A: Each state may nominate a minimum of 25 total eligible census tracts but no more than 25 percent of the total number of eligible census tracts within the state.

Does My State Recognize Opportunity Zones

How to create a qualified opportunity zone fund | Qualified OZ Funds for Capital Gains explained

Helberg said that investors must ensure that their state recognizes the tax deferral of opportunity zones.

California is one example where the state does not conform with the federal initiative, Helberg said. It is important to consider the state income tax implications when evaluating the costs and benefits of investing in an opportunity zone.

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What Are The Tax Benefits For Opportunity Zone Investors

While Opportunity Zones were created by a federal tax law, there are implications for taxes levied at federal and state levels.

Federal Tax Benefits

Over time, you gain three significant federal tax benefits from your qualifying investment in a Qualified Opportunity Fund. The first two apply to the original capital gain that you reinvest. The third applies to the longer-term appreciation in the value of your Opportunity Zone investment.

Deferral You can defer the tax that would otherwise be due on the capital gains that arise from transactions between December 22, 2017 and before January 1, 2027 and that you reinvest in the Opportunity Zone. However, you cant defer a gain if it arises from a sale or exchange with a related party.

Typically, the deferral extends until December 31, 2026. At that time, the amount of the underlying gain that you reinvested is taxable, less any exclusion percent based on your holding period, as described below.

However, there are two events that can end the deferral at an earlier date:

a sale or exchange of all or a portion of your investment

an inclusion event

Exclusion If you hold your qualifying investment in the Opportunity Zone for more than five years, you can exclude ten percent of the deferred gain from federal capital gains tax. In other words, only 90 percent of the original gain is subject to tax.

State Tax Implications

Its further complicated by the fact that an Opportunity Zone investment can involve more than one state.

How Were Opportunity Zones Created

Opportunity Zones were created by the Investing in Opportunity Act, part of the Tax Cuts and Jobs Act of 2017. This act received significant bipartisan support and was championed by Senators Tim Scott and Corey Booker. It was also championed by the Economic Innovation Group, a think tank created by entrepreneur Sean Parker, founder of the music-sharing service Napster.

The Investing in Opportunity Act requested that state and territorial governors, as well as the mayor of Washington, D.C., nominate up to 25% of the low-income census tracts in their state or territory as Opportunity Zones, economically disadvantaged areas which are in need of additional investment.

In order to qualify for the program, census tracts must additionally have:

  • A minimum poverty rate of 20% or

  • A median family income of less than or equal to 80% of the statewide median family income for non-urban census tracts or

  • For census tracts within metropolitan areas, a median family income of less than or equal to 80% of the statewide median family income or the median family income for urban census tracts in the state

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No Taxation On Appreciation

For investors that keep their investment in the fund for at least 10 years, the property will then be equal to fair market value from the date of sale or exchange of the asset. Keep in mind, while this can potentially lower the cost basis, it doesnt eliminate the gain recognized on December 31, 2026.

For example, lets say a taxpayer makes a $5 million investment in a Qualified Opportunity Zone Fund in 2021. If the investor sells the investment in 2031 for $10 million, the $5 million in appreciation is free of taxation. However, the investor will have to pay income taxes since the fund was held beyond 2026. These taxes will correspond with the sale of the investment.


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