How To Invest In Qualified Opportunity Fund


The Benefits Of Investing In A Qof

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


Since coming into effect in January 2018, Subchapter Z of the US Tax Codealso known as the opportunity zone provisionshas enabled investors to pour billions of dollars into a broad array of businesses, from real estate development companies to tech startups. Investments in qualified opportunity funds offer a number of distinct tax benefits, not the least of which is reduced capital gains tax liability. But the rules governing these investments are quirky, perplexing andin some casesseverely restrictive.

In the following series of articles, we discuss the basics of investing in a QOF, offer a detailed analysis of the law surrounding the opportunity zone provisions, and provide case studies that more closely examine the industry-specific structuring of opportunity zones.

Chapter : What Are Qualified Opportunity Funds

A Qualified Opportunity Fund is any investment vehicle organized as a partnership or corporation for the purpose of investing in at least one Qualified Opportunity Zone. A Qualified Opportunity Fund must hold at least 90 percent of its assets in Qualified Opportunity Zone Property. Learn how to invest.

In the appendix to this guide, several examples demonstrate the tax savings potential of investing in Opportunity Zones, and the resulting impact on investment returns.

Designated Qualified Opportunity Zones

Q6. Do I need to live in a QOZ to take advantage of these tax incentives?

A6. No. You can take advantage of these tax incentives even if you dont live, work, or have an existing business in a QOZ. All you need to do is invest the amount of a recognized eligible gain in a QOF and elect to defer the tax on that gain.

Q9. How can I find the census tract number for a specific address?

A9. You can find 11-digit census tract numbers, also known as GEOIDs, using the U.S. Census Bureaus Geocoder. After entering the street address, select Public_AR_Current in the Benchmark dropdown menu and Census2010_Current in the Vintage dropdown menu, and click Find. In the Census Tracts section, youll find the number after GEOID.

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Understanding Qualified Opportunity Zone Funds

A Qualified Opportunity Zone Fund is an investment vehicle that is organized by corporations and partnerships. Investors can do this by filing Form 8996. The intention behind all Qualified Opportunity Zone Funds is to invest in real estate or develop businesses in areas that are called Qualified Opportunity Zones. In order to meet this requirement, this fund must hold at least 90% of its assets in Qualified Opportunity Zone properties.

Like other investments, these funds can increase and decrease in value during the holding period. Theres also a possibility that the investment can yield a cash flow. However, since the purpose of the investment is to help communities gain traction, all proceeds should be reinvested to help increase growth in these communities. But, once property improvements are done, investors can sell the property to a third party for cash flow.

Currently, its challenging to assess the level of risk this investment yields. Because the IRS and U.S. Treasury are still figuring out how these funds will perform over time, its hard to establish a risk level. Some potential risks of this investment may include liquidly risk, market loss and business risk.

The purpose of a Qualified Opportunity Zone is to revive a community that is facing economic stress. The 2017s Tax Cuts and Jobs Act established the Qualified Opportunity Zone program to offer tax benefits to private investors who invest in these communities.

How To Invest Capital Gains In Qualified Opportunity Zone Funds

Opportunity Zones

After a strong several years of up markets and asset prices, many investors are sitting on large capital gains. Valuations are high across stocks, real estate, and private equity. Where is a compelling place to invest capital?

Opportunity Zones , created by the Tax Cut and Jobs Act of 2017, may be part of the answer. The goal of OZs is to incentivize investment in economic areas that have not participated in the recovery since the Great Recession.

Governors from all 50 states, six territories, and the District of Columbia designated areas as OZs, which were certified by Treasury. This result was 8,766 individual OZ census tracts. Many of these areas are on the upswing already due to revitalization by local developers and businesses.

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How To Elect The Eligible Gain Deferral

You must invest the eligible gain in a Qualified Opportunity Fund in exchange for an equity interest in the Qualified Opportunity Fund . Once you have done this, you can elect the deferral on Form 8949, Sales and Other Dispositions of Capital Assets, for the taxable year in which the gain would be recognized if you didnt defer it. Also, complete and submit Form 8997, Initial and Annual Statement of Qualified Opportunity Fund Investments.

To elect to defer tax on a gain if you already filed your federal income tax return, file an amended return or an Administrative Adjustment Request , as appropriate, with a completed election on Form 8949. Review the guidance provided on Form 8949 Instructions for reporting eligible gains.

How To Start Investing In Qualified Opportunity Funds

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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Qualified Opportunity Zone Property

Qualified Opportunity Zone property is used to refer to property that is a Qualified Opportunity Zone stock, a Qualified Opportunity Zone partnership interest, or a Qualified Opportunity Zone business property acquired after December 31, 2017, used in a trade or business conducted in a Qualified Opportunity Zone or ownership interest in an entity operating with such tangible property.

Conceptually, the Qualified Opportunity Fund must bring property new to the entity to be used in the Opportunity Zone. A fund that simply acquires property already being used in the zone will not qualify without substantial improvement. Substantial improvement requires improvements to exceed the Qualified Opportunity Funds initial investment into the existing property over a 30-month period.

For instance, if a Qualified Opportunity Fund acquires existing real property in an Opportunity Zone for $1 million, the fund has 30 months to invest an amount greater than the $1 million purchase price for improvements to the property in order to qualify for this program. Certain businesses, such as golf courses, country clubs, massage parlors, hot tub facilities, suntan facilities, race tracks or other facilities used for gambling, and liquor stores, are prohibited for Qualified Opportunity Fund investments.

The 13 Things You Need To Know About Setting Up A Qualified Opportunity Fund

Qualified Opportunity Funds – The Basics of Qualified Opportunity Funds 101

The key for real estate developers, fund sponsors and investors is to familiarize themselves with the Qualified Opportunity Zone Program early so they can take advantage of its benefits when planning new projects. From a sponsor perspective, it is essential to ensure that their QOF is structured properly to allow investors making an investment to receive the full potential tax benefits of the QOZ program. Based upon the statute, various published articles1, and our participation in the Novogradac Opportunity Zone Working Group , here are some high-level basics:

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Getting Started With Qualified Opportunity Funds

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With this years strong stock and property markets, figuring out how to minimize capital gains tax may be top of mind for investors. Qualified opportunity funds can provide tax advantages, but acting fast makes a difference: You can reap the benefits of three tax perks instead of just two if you invest by year-end.

Arent These Investment Opportunities In Really Bad Areas

But wait a minute, a skeptical investor says, Arent these investment opportunities in really bad areas where maybe no one would want to invest their capital? Thats a good question.

To gain some insight, lets go back to when this legislation was formed. In the U.S., 8,760 Census Tract areas are designated as QOZs. When this legislation was created, the governor of each state was asked to participate in naming the areas in their state that could benefit most from economic development.

As you might expect, many of these areas are economically blighted, and some are high-crime areas. Many are just rural parts of the country and lack services and opportunities for the residents. Some areas, however, are what real estate investors are calling diamonds in the rough. These are areas that developers studies show to be ripe and ready for development due to shifting demographics that provide a real demand for real estate development and bring services and an increased tax base to a community in need.

Its important to note that when these areas were selected, it was 2010 Census data that was used for the selection. Much can change in a decade, and today, real estate developers are finding many QOZ areas can stand on their own two feet, apart from all the tax-favored treatment.

Courtesy of Daniel Goodwin

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Investing In Opportunity Zone Properties

Opportunity funds must make substantial improvements to the properties in which they invest. The TCJA defines substantial improvements as investments in the property that are equal to the original value paid by the fund. These must be made within 30 months. For example, if a property is purchased for $700,000, then the opportunity fund has a 30-month window to make at least $700,000 worth of improvements.

Certain types of businesses cannot be included in opportunity funds, even if they reside within opportunity zones. They include:

  • Golf courses
  • Racetracks or other facilities used for gambling
  • Liquor stores

Investors can defer their tax payments on prior investment gains if those gains are then invested in a qualified opportunity fund within 180 days after the sale. Taxes are then deferred to either the day when the opportunity fund investment is sold or exchanged, or Dec. 31, 2026whichever comes first.

What Are Other Benefits Of Opportunity Zone Investing

Using Qualified Opportunity Zone Funds To Avoid Capital Gains

Opportunity Zones offer four other attractive benefits to real estate investors compared to the empowerment zones and renewal communities programs previously authorized by Congress:

  • Capital gains only need to be reinvested, not the entire proceeds from a previous asset sale.
  • Capital gains can be deferred from sales made outside of QOZs, not only from within.
  • Any type of capital gain stocks, Bitcoin, precious metals, and more qualify for Opportunity Zone investment.
  • Opportunity Funds may be created by syndicators to invest in a variety of QOZ opportunities such as residential rental property.

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What Are The Tax Benefits

The benefit of investing in a qualified opportunity fund is that you can defer tax on your capital gains. Almost all of your gains will qualify for tax deferral. If the fund is a partnership, you can defer tax at the partnership or partner level. Similar rules also apply for funds that are corporations. The capital gains you initially defer will be picked up when you sell your new investment, or on Dec. 31, 2026, whichever occurs first.

If you hold the investment for more than five years, 10% of the deferred gains are excluded from the tax deferral. If you hold this investment for more than seven years, the percentage increases to 15%.

If you hold your investment for at least 10 years, you can adjust the basis of your investment to its fair market value on the date you sell or exchange the investment. You have until Dec. 31, 2047, to reach your 10-year holding period and recognize this tax benefit.

How To Invest In A Qualified Opportunity Fund: An Update On Qualified Opportunity Zone Investment From The Irs

Qualified opportunity zones are quite possibly the largest tax savings tool out of the tax reform passed in December of 2017. In a previous article, we outlined some of the basics of what an opportunity zone is and why you should invest in them, but a recent update provides clarity on how to invest in a qualified opportunity fund .

The initial tax law on this program contained a number of grey areas that required further interpretation from the Treasury Department. In October 2018, the IRS issued proposed regulations and other guidance on how to qualify and utilize the tax benefits of the opportunity zones.

Here are the answers to some of the most relevant and important questions about how to invest in a qualified opportunity fund.

Who can invest in a qualified opportunity fund ?

The regulations proposed have clarified that any taxable entity is eligible. Therefore an individual, partnership, corporation or trust may elect to invest in a QOF.

Can I use ordinary income or other existing assets to invest in a QOF?

The IRS clarified that only capital gains are allowed to be subject to the deferral benefits and basis step-ups at the 5-, 7-, and 10-year holding periods. Therefore no items of ordinary income are eligible to be deferred.

Can I hold the investment in perpetuity and get a basis step-up whenever I sell?

Ive invested into a QOF. Can I retain working capital in the fund while completing my investment?

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Common Questions About Real Estate Opportunity Zone Investing

Is there a time limit for investing capital gains in an Opportunity Fund?

Yes, the same time limit of 180 days that applies to 1031 Exchanges also applies to Opportunity Funds.

How are 1031 tax-deferred exchanges different from investing in an Opportunity Zone?

The biggest similarity is that 1031 exchanges and an Opportunity Zones can both defer or eliminate capital gains tax. That said, Opportunity Zone investing does not carry with it the like-kind constraint of a 1031 exchange.

Can more than the amount of capital gains be invested in an Opportunity Fund?

Yes, investors may invest more money than the amount of capital gains. In effect, the investor would be making two investments: One to defer capital gains, and the second as a regular investment unrelated to its capital gains.

How is an Opportunity Fund formed?

There are no laws limiting who can form an Opportunity Fund. Qualified Funds must:

  • Be an entity organized for the purpose of investing in Qualified Opportunity Zone property
  • Hold at least 90% of its property such as stock, partnership interests, or real estate within a QOZ
  • Self-certify to the IRS using Form 8996 as an Opportunity Fund and verify that they are fulfilling the 90% asset requirement

What happens next? In January 2019 the IRS will hold a public hearing on proposed regulations for the Qualified Opportunity Zone programs, and issue further rulemaking.

Why Invest In Qualified Opportunity Funds

QOZ (Qualified Opportunity Zone) Investment Fund Explained: Webinar

Say youve sold an asset and have a large capital gains tax liability on your hands. Or youd like to offload an investment, but the capital gains tax consequences have kept you from doing so. By rolling those capital gains into a qualified opportunity fund, you can defer and reduce your capital gains tax liability, diversify your portfolio and make a positive impact.

There are three main tax benefits of investing in qualified opportunity funds, and in particular, in investing in these funds in 2021:

  • You can defer paying taxes on your original capital gain until the tax year 2026, which means you won’t actually pay taxes until you file your 2026 tax return in 2027.

  • If you invest by the end of 2021, you’ll be able to hold your investment for five years, which allows you to qualify for a 10% reduction in the original deferred capital gain amount due in 2027.

  • If you hold your investment for at least 10 years, you’ll owe no capital gains on any additional appreciation beyond what you paid in 2027. When investing in qualified opportunity funds, the longer you hold onto your investment, the greater your overall tax benefit.

  • Its very substantial. The net benefit to investors or the impact is between 40% to 50% higher after-tax returns than a non-opportunity zone investment, says Jill Homan, president of Javelin 19 Investments, a Washington, D.C.-based real estate and investment advisory firm focused on qualified opportunity zones.

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    Where To Find Qualified Opportunity Zones

    Opportunity zones currently exist in all 50 U.S. states, as well as Washington, D.C., and five U.S. territories. To view all qualified opportunity zones, search the list below, or visit the U.S. Department of the Treasury for the most up-to-date listings.

    Zones are identified by state, county, and census tract numbers. To determine the census tract number for a specific address, visit the U.S. Census Bureaus Geocoder. Enter the address youd like to find, and select ACS2015_Current from the drop-down menu of available datasets to search.

    The Gulf Opportunity Zone, for example, was established for the area that was largely impacted by the storms surrounding Hurricane Katrina in 2005, including parts of Alabama, Louisiana, and Mississippi.


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