Opportunity Zone Investment Funds Vanguard


What Are The Risks


Just because you could get a significant tax break from an opportunity zone fund does not mean that it is a good investment.

This is the Wild West, right now, says Tkaczuk. Youre going into a new frontier trying to figure out whats a safe place to homestead.

Since the funds are popping up very quickly, there are risks in overpaying the fees people will charge for setting these up, says Tkaczuk. And there could be a lot of dead-end projects.

You could do all your due diligence and the project may still not make money. These are difficult to invest in communities, by definition.

Opportunity funds are still very new, so theyre slowly gaining investors.

Theres is a lot of attention right now, but not a lot of activity, says Ben Miller, CEO of Fundrise, which launched the Fundrise Opportunity Fund in September. A lot of people are planning and exploring, but investments arent being made yet.

Some funds have a minimum investment of $25,000, which would likely be a capital gain earned elsewhere. Others funds have a much higher threshold.

That may change over time. Miller says hed be interested in working with the SEC to offer funds with lower minimum investments. But the industry has to figure out its existing regulations first.

I think it has a lot of potential as an investment, but I approach it with a healthy dose of skepticism, says Jeffrey Levine, CEO and director of financial planning with BluePrint Wealth Alliance.

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.

Opportunity Zone Investing In Action

Lets take a look at a case study. Eight years ago, Julie purchased a small apartment building in her hometown. The property was priced right when she bought it, and over the years generated a nice healthy cash flow and to her pleasant surprise has nearly doubled in value.

Shes built up a lot of equity in the building and figures that now might be a good time to sell, when the market is so strong. But the problem is paying capital gains tax. Julie knows she can use a 1031 Exchange to defer capital gains but she is concerned about finding a like-kind replacement especially while multifamily cap rates are at historic lows.

Julie wants to stay invested in real estate, but hopefully in a less hands-on role than she has had with her previous apartments. She begins researching alternative real estate investments and discovers the Qualified Opportunity Zone program. The more she learns about opportunity zone investing, the more she likes what she sees.

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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.

The Risks And Rewards Of Investing In An Opportunity Zone

Nows the Opportunity for Cities to Work on Their Zone Defense

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.

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How Do I Invest

The biggest benefits of investing in an opportunity fund go to those who have a large capital gains tax bill to defer.

Heres how it works. After selling an appreciated asset it could be stocks, bonds, real estate or a business an investor puts the money they gained from the sale into an opportunity fund within 180 days. For an investment held for longer than five years, there is a 10% exclusion of the deferred gain. If held for more than seven years, the 10% becomes 15%. Separately, investments held for ten years will not be taxed on gains earned from the opportunity fund.

There is no central exchange of funds, says Adam Tkaczuk, tax consultant at Sterling Point Capital. It may take some time to learn where your money is welcome.

With new funds being put together very quickly, youll need to find out what is in the fund and how much the fees are. Tkaczuk said he spoke with the founders of a fund launching in New York, and their proposition is: Were going to find a bunch of projects and you have to take our word for it.

A good fund, he says, are those established by a firm or real estate developer with a track record of investing, preferably someone already working in the opportunity zone. He suggests talking real estate developers, commercial real estate brokers, economic development agencies and companies operating in these areas.

Alternatively, investors with the time , can create their own fund, since this could reduce fees and provide transparency.

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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How Can I Invest In An Opportunity Zone Fund

There are quite a few places that allow you to invest in Opportunity Zone Funds! As with any investment, it is essential that you choose both a company, an advisor, a portfolio, and a mission that you can live with.

In particular, Opportunity Funds can make a near-immediate difference in someones life. Investing in these funds is a smart way to make sure your money really makes a difference.

  • Fundrise offers Opportunity Funds that focus on real estate. The company invests in major US cities with long-term growth potential to help investors make the best use of their capital gains. Fundrise also boasts an approach to investing that is low-cost.
  • Calibers Opportunity Funds utilize diversified portfolios to help clients reinvest their capital gains. Their website offers a link to a map that illustrates opportunity zones so that investors can better understand where their funds can go geographically.
  • Cresset Capital has recently partnered with a real estate investing firm to provide Opportunity Funds across all the United States. The investment options include real estate, development, re-development, and private company investments.
  • In most cases, you must be a qualified or accredited investor to purchase shares in an opportunity fund. The Motley Fool has a nice article on qualified investors.

    Bonus Speculative Investments What Percent Should I Invest In?

    To be considered a qualified investor you must meet one of the following criteria:

    Do It For The Right Reasons

    How to Invest in Opportunity Zones

    Tax-free capital gains sound great, but if your fund or project flops then therell be no gains to enjoy. Opportunity zone investments should be based on the same criteria as any other investment, with the focus on the strength of the underlying investment itself rather than the potential tax break. The best way to look at the tax benefits is as an extra bonus that will juice up your after-tax returns if theyre successful, rather than a reason to invest by itself.

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    Chapter : Inequality In America And The Promise Of Place

    How the rise of inequality in America paved the way for several place-based policies over the years, leading to the Investing in Opportunity Act, a modified version of which was passed as part of the Tax Cuts & Jobs Act of 2017.

    The Investing in Opportunity Act is the legislation that defines Internal Revenue Code Section 1400Z, otherwise known as the Opportunity Zones tax incentive. The Congressional intent of the policy is to redirect private capital into under-invested, economically distressed communities.

    Tax Incentives For Qualified Opportunity Zone Funds

    An investor who is subject to capital gains as the result of an asset sale can take advantage of the tax incentives of investing in a Qualified Opportunity Zone Fund, so long as the investment is made within 180 days of the recognition date.

    Note 1: For investors who recognize a capital gain through a partnership Schedule K-1, the recognition date for the purposes of Opportunity Zone investing is the due date for the partnerships federal tax return, typically March 15 of the following year. For example: a partnership realizes a capital gain on September 1, 2020. The gain is reported on the partners Schedule K-1 by March 15, 2021. The partner would have until September 11, 2021 to re-invest his gains into a Qualified Opportunity Fund.

    Note 2: In June 2020, the IRS issued Notice 2020-39, which extended the 180-day deadline to provide taxpayers affected by the coronavirus pandemic with additional relief. The notice states that for any 180-day period that ends on or after April 1, 2020 and before December 31, 2020, the investment deadline is automatically extended to December 31, 2020.

    The gain can come from any type of asset sale typically real estate publicly traded securities such as stocks, bonds, mutual funds, ETFs the sale of a privately held business collectibles or crypto assets, including Bitcoin.

    Taxpayers who rollover their capital gains into a Qualified Opportunity Fund can benefit from three tax benefits deferral, reduction, and exclusion.

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    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.

    Grubb Properties Link Apartments Opportunity Zone Reit

    Opportunity Zone

    Resulting from the merger of Grubbs 2019, 2020 and 2021 Qualified Opportunity Funds, the Link OZ REIT has over $350 million in assets under management.

    Like its predecessors, the Link OZ REIT focuses on the development of projects under Grubb Properties Link Apartments brand, which is designed to provide essential housing across the United States. Essential housing and Link Apartments fill the gap between subsidized and luxury apartments. There are currently 19 Link Apartments communities stabilized or under construction across the country, totaling 4,935 multifamily units, with 16 additional communities in the pipeline. The communities offer an amenity-rich living experience to residents who want to live near transit, employment, and entertainment venues.

    The Link Apartments Opportunity Zone REIT launched with 14 Link Apartments communities under construction or announced in Opportunity Zones nationwide, including in gateway markets in California , New York and Washington, D.C.

    Fund Manager:

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    A New Type Of Fund That Invests In Low

    The prospect of investing in dilapidated inner-city neighborhoods or tumbleweed-ridden rural towns may not excite most investors. But a program embedded in the 2017 Tax Cuts and Jobs Act offers investors a tax incentive to do just that. As a result, a new type of fund that invests in low-income communities has popped up, and investors and institutions alike are starting to take notice. Youve probably heard of opportunity zones. If youre wealthy enough, you may have received a pitch to invest in an opportunity zone fund. These new investments sound appealing, but theyre not for everyone.

    The new OZ funds pool money from multiple investors and invest in businesses and real estate development projects located in economically distressed communities that the federal government has designated as in need of investment. The more than 8,700 opportunity zones include parts of nearly every major American city, including Chicago and Los Angeles, as well as all of Puerto Rico and remote towns in Alaska. Investors who put money in OZ funds can defer and eventually reduce taxable capital gains, depending on how long they stay invested.

    Hold for 10 years or more and a third benefit kicks in: Any gain in your investment in the fund is tax-freeas long as your outlay was made with capital gains from a prior investment. Some funds require that you hold for 10 years, but the vast majority allow you to sell at any time.

    How Does The Qualified Opportunity Zone Program Work

    Rather than using taxpayer dollars to stimulate economic growth in these communities, the government decided to use private investments. To encourage private participation, individuals who invest in Qualified Opportunities Zones are eligible for tax incentives.

    To capitalize on this program, a taxpayer must invest their proceeds from their sale of an asset into a Qualified Opportunity Zone Fund. This must happen within 180 days of the sale. However, while a taxpayer may invest the returns of the sale of an asset, as well as the potential gains, the tax incentive only applies to the capital gains.

    Also noteworthy, investors can use the proceeds from any appreciated asset. Its not a requirement to invest with a like-kind asset to defer potential gains.

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    Pros And Cons Of Investing In Opportunity Zone Funds

    Opportunity zone funds offer major potential, such as tax incentives and breaks to participating investors, all while helping economically challenged communities. However, choosing the right investment vehicle and market are key to a successful investment. With over 8,700 different census tracts to potentially invest in, fund managers must identify the markets that hold the most opportunities while providing the most stability and security, given the nature of investing in economically depressed areas. Those who choose wisely can be handsomely rewarded.

    Eligible investors who have or will have significant capital gains that would benefit from tax deferral or capital gain reductions should carefully consider investing in an opportunity zone fund. The tax benefits are tremendous, but only for the patient investor. Since investments require a minimum five-year investment, money placed into a qualified opportunity zone fund is somewhat illiquid until the fund’s disposition or capital structure is completed.

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    Qualified Opportunity Funds – The Basics of Qualified Opportunity Funds 101

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