Investing In Opportunity Zone Funds


Using Opportunity Funds To Invest In Opportunity Zones

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

In her research, Julie noticed that the phrase Opportunity Fund kept coming up. She soon realized that Opportunity Funds are the designated investment vehicle used to invest in Qualified Opportunity Zones.

The IRS defines Qualified Opportunity Funds as U.S. partnerships or corporations set up for investing in eligible property that is located in a Qualified Opportunity Zone.

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.

Can I Buy A House In An Opportunity Zone And Call It An Investment

Since the 2017 launch of the Opportunity Zone program, investors are placing their capital gains into any number of available Qualified Opportunity Funds . Those funds, in turn, are investing in projects ranging from apartment and office renovations, to ground-up retail centers.

One type of investment we dont hear much about is single-family housing. In fact, a frequent question is: can I buy a house in an opportunity zone and call it an investment?

The answer is: yes . . . but. You can buy anything in a Qualified Opportunity Zone and call it an investment. However, to ensure receipt of the QOZ programs tax-deferral benefits, that house must meet several requirements.

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The Risks And Rewards Of Investing In An Opportunity Zone

Taking advantage of tax breaks while helping communities that could use a leg up seems like a win-win scenario. It is, for the most part. If youre investing for the tax benefit and the sense of philanthropy, youre in the right mindset.

One difficult thing about opportunity zones is that they tie up your money. To receive the full tax benefit of investing in one, your money will need to stay put for a minimum of 5 years. If you need the money at any time, withdrawing it from the opportunity fund could mean losing the tax benefit.

These funds are for serious and patient investors. Financial experts recommend you bring significant capital gains to the table when investing in opportunity zones. If youre not there yet, there may be better investment strategies for you.Like most investments, opportunity funds will perform best if you choose wisely. Research what youre putting your money into. There are over 8,700 different opportunity zones. Fund managers must choose communities that show growth and stability. This way, the fund grows and the community benefits.

Can Public Benefit Corporations Get Qualified Opportunity Zone Funding

Opportunity Zones

The relationship between Public Benefit Corporations and Qualified Opportunity Zones is a tricky one, primarily because of how the two are allowed to interact. PBCs are considered B corporations by the IRS. Conversely, non-profit organizations are considered C corporations. Unfortunately, B corporations are not eligible to receive funding from Qualified Opportunity Zones. However, that does not mean that there are not ways for Public Benefit Corporations to enjoy some of the benefits of Qualified Opportunity Zones. According to the Federal Tax Code, any person or entity who files a federal income tax return is eligible to invest in QOZs. With that in mind, these for-profit corporations can invest a portion of their funds in QOZs to receive the tax incentives associated with doing so.

Qualified Opportunity Zones and Public Benefit Corporations are both tools that can positively impact communities. Understanding the investment rules that surround them and their interactions with one another is an important aspect of fully understanding how they work.

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Qualified Opportunity Zone Funds: A Private Investment With Tax Benefits

There has been much discussion regarding the Qualified Opportunity Zone program established via the Tax Cuts and Jobs Act in 2017 because of potential tax advantages. This program aims to incent long-term private sector investment in low-income communities nationwide while allowing investors to potentially defer and partially reduce capital gains tax by investing capital gain amounts in Qualified Opportunity Zone through a Qualified Opportunity Zone Fund. When considering a QOZ Fund, as with any investment, it is important to ensure that the investment is sound, prudent and addresses ones financial objectives.

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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.

What Eligible Capital Gains Can I Invest In Opportunity Zones

HUD’s Carson on Opportunity Zone Investing

Opportunity zones provide an opportunity to invest capital gains in real estate while deferring tax payment on those gains. Its important to know which capital gains are eligible. Otherwise, you might invalidate your OZ tax benefits. In this article, well dig into the details of what makes an eligible opportunity zone capital gain.

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The Tax Incentives Outlined

There are three potential tax incentives to investing in economically distressed communities:

  • A temporary deferral: An investor can defer capital gains until 2026 by putting and keeping realized gains in an OZ Fund.

  • A reduction in capital gains: the original amount of capital gains on which an investor has to pay deferred taxes is reduced by 10% if the OZ Fund investment is held for 5 years and another 5% if held for 7 years.

  • An exemption of capital gains on appreciation: any capital gains on investments made through the OZ Fund accrue tax-free as long as the investor holds them for at least 10 years.

Who Should Invest In An Opportunity Zone Fund And Why

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.

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Why Invest In Qualified Opportunity Funds

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.

    Choosing Your Oz Investment Opportunity Wisely

    Opportunity Zones
    • Diversified funds aggregate investor capital and deploy it across different assets, creating diversification and decreasing risk for the fund and its investors.
    • Single-asset direct QOF investments allow investors to invest directly into a pre-identified asset and the investment gives the QOF and investors an ownership position in that single asset.

    There are some opportunities available for OZ investors to invest in businesses and funds that invest in businesses, but those investment opportunities have been less common and havent seen as much activity as real estate. And while qualifying for the 10% basis step-up is an incentive to make an OZ investment by December 31, 2021, finding a long-term investment that fits within your overall investment strategy may be more important.

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    The Tax Benefits Of Investing In A Qualified Opportunity Fund

    Investors who have eligible capital gains, which could be from the sale of stocks, real estate, businesses, or other investments earned before Jan. 1, 2027, can roll their qualified gains into a qualified opportunity fund. Investors have 180 days or less from the realized gain to elect their eligible gain by filing Form 8949 as well as Form 8997, which provides them the opportunity to benefit from the following tax incentives:

    • Any tax on capital gains placed into a QOF, regardless of how long the investment is held, is able to be deferred until the investment is realized or sold on Dec. 31, 2026, whichever is sooner.
    • If qualified capital gains are invested in a QOF for five years or more, capital gains on the original cost basis is reduced by 10%.
    • If the investment is held for seven years or more, the cost basis for the original capital gain is reduced by 15%.
    • If the investment is held for 10 years or more, the investor benefits from the 15% cost basis reduction of the original capital gain, in addition to paying zero capital gain tax on the new investment appreciation, which is any returns earned from the opportunity zone investment specifically.

    The takeaway: The longer the investments are held in the OZ, the greater the benefit to the QOF and its investors.

    What Is A Public Benefit Corporation

    A Public Benefit Corporation, also referred to as a PBC, is a type of for-profit entity that is recognized by the United States government. There are two important aspects of PBCs to remember. First, they are currently only recognized in 35 states and the District of Columbia. Second, there are certain requirements that a Public Benefit Corporation must meet in order to be considered as such. In addition to the PBCs legally defined goals including generating a profit, the entity also must prove that they are working toward a goal of positively impacting society, workers, the community, the environment, or another area of public interest.

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    What Is The Florida Housing Coalitions Role In Opportunity Zones

    The Opportunity Zones program is the most hands-off Federal initiative designed to spur economic development in low-income communities over the past 50 years. Current IRS regulations do not require OZ projects to meet affordable housing requirements or other reporting standards that have characterized Enterprise Zones, the Low-Income Housing Tax Credit, the New Markets Tax Credit, and similar past programs.

    Because the definition of a trade or business is so broad when characterizing a Qualified Opportunity Zone Business that can receive OZ capital, there is the potential that many projects may bear little relationship to a communitys needs. The Florida Housing Coalition is focused on ensuring that Opportunity Zone investment benefits the low-income communities the Program was designed to serve. We are dedicated to making sure that Opportunity Zone projects revitalize communities without displacing existing residents.

    Local Government Planning

    Although Opportunity Zones are a federal initiative, the effects will be felt locally. The Florida Housing Coalition works with local governments to plan and prepare for OZ investment within their communities. Because of the hands-off approach of the Federal government, local governments have the responsibility to ensure that OZ investment benefits existing communities without causing displacement.

    Community-Centric Development

    No Taxation On Appreciation

    Group Investing and Opportunity Zones Explained (Full Webinar)

    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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    Tax Deferral And Savings

    A Qualified Opportunity Fund investment provides potential tax savings in three ways:

    Tax deferral through 2026 – A taxpayer may elect to defer the tax on some or all of a capital gain if, during the 180-day period beginning at the date of sale/exchange, they invest in a Qualified Opportunity Fund. Any taxable gain invested in a Qualified Opportunity Fund is not recognized until December 31, 2026 , or until the interest in the fund is sold or exchanged, whichever occurs first. In addition, the deferred gain can be further reduced as described below.

    Step-up in tax basis of 10% or up to 15% of deferred gains – A taxpayer who defers gains through a Qualified Opportunity Fund investment receives a 10% step-up in tax basis after five years and an additional 5% step-up after seven years. Note that to take full advantage of the 15% step-up in tax basis, the taxpayer must have invested by December 31, 2019. When the tax is triggered at the end of 2026, the taxpayer will have held the investment in the fund for seven years, thereby qualifying for the 15% increase in tax basis.

    No tax on appreciation – Remaining in the Qualified Opportunity Fund for at least 10 years results in the cost basis of the property being equal to the fair market value on the date of sale/exchange.

    Pros And Cons Of Qoz Homes

    With all of the above involved with QOZ homeownership, is this type of investment worthwhile? To answer this, its a good idea to consider the following advantages and disadvantages of acquiring a QOZ house.


    • Targeted areas likely to experience increased economic and commercial growth
    • Potential increase in home and rental values


    • Requirement of time and financial resources
    • Substantial improvement means doubling the investment amount
    • Program success isnt guaranteed neighborhoods are at risk from factors including crime, poor economics, and lack of infrastructure

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    How Opportunity Zone Funds Can Reduce Your Tax Liability

    Many crypto and blockchain investors have significant realized and unrealized capital gains in their portfolios, especially after the 2021 bull market. There are numerous tax strategies to manage capital gains including harvesting tax losses, funding retirement plans, charitable contributions, etc. In 2017, a new strategy arose when Congress enacted the Opportunity Zone rules to encourage economic growth and investment in designated distressed low-income communities while providing capital gains tax benefits to investors.

    Although most OZ funds historically focused on traditional real estate, recently, some funds focused on crypto have launched new OZ funds. Some appear to concentrate more on bitcoin mining, such as Redivider Blockchain Opportunity Zone Fund. Conversely, others offer exposure to alternative crypto and Web 3 assets, such as Blockchain OZ Fund.

    Operationally, taxpayers participate in an OZ by investing prior capital gains into a Qualified Opportunity Fund within certain deadlines. Generally, taxpayers have 180 days to invest a prior gain in an OZ Fund. The period can be significantly longer for those realizing capital gains through partnerships , RICs, REITs, or certain other investment vehicles.

    The OZ rules provide two main tax incentives:



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