What Is an Opportunity Fund?
An opportunity fund is an investment vehicle designed to invest in real estate or business development in areas known as “opportunity zones.”
Opportunity zones are particular geographic areas that have been designated as economically distressed. As a result, these areas may be subject to different economic regulations than otherregions in the country or state. Tax incentives for investments in opportunity zones include delayed and potentially reduced taxes on capital gains.
Key Takeaways
- An opportunity fund facilitates investments in opportunity zones—regions identified as experiencing economic hardship and in need of stimulus.
- Opportunity funds help to rehabilitate these regions while also providing investors with certain tax advantages and benefits.
- Opportunity funds arose out of the creation of opportunity zones as part of the 2017 Tax Cuts and Jobs Act (TCJA), and can only include certain types of land or business development in order to qualify.
Understanding Opportunity Funds
Opportunity funds were established as part of the 2017 Tax Cuts and Jobs Act (TCJA) to encourage investment in underfunded, low-income, and distressed communities. For a community to be classified as an opportunity zone, it must be designated by the state and subsequently certified by the secretary of the U.S. Treasury, via the Internal Revenue Service (IRS).
An investment fund created by a corporation or partnership can become designated as a qualified opportunity fund by filing IRS Form 8996 with their federal income tax return. Once designated, the fund must invest at least 90% of its assets in designated opportunity zones to receive preferential tax treatment.
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
- Country clubs
- Massage parlors
- Hot tub facilities
- Suntan facilities
- 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, 2026—whichever comes first.
Tax Advantages of Qualified Opportunity Funds
Beyond the ability to defer taxation of previous gains, the longer a participant holds their qualified opportunity fund investment, the smaller their tax burden may be.
- If held for longer than five years, then investors receive a 10% exclusion of the deferred gain on their investment.
- If an investor holds for more than seven years, then they receive a 15% exclusion.
- After 10 years, the investor does not owe federal income taxes on the fund’s appreciation by the date of sale.
Given that opportunity funds are relatively new on the scene, and that the Trump administration that facilitated them is no longer in office, specific rules and regulations for investment in, and taxation of, qualified opportunity funds could be subject to change. Investors interested in participating should consult investment and tax professionals.
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 Bureau’s Geocoder. Enter the address you’d like to find, and select “Public_AR_Current” from the drop-down menu of available datasets to search.
The Gulf Opportunity Zone, for example, was established for the area that was largelyimpactedby the storms surrounding Hurricane Katrina in 2005, including parts of Alabama, Louisiana, and Mississippi.
FAQs
A Qualified Opportunity Fund is any investment vehicle that is organized as a corporation or a partnership for the purpose of investing in Qualified Opportunity Zone property (other than another Qualified Opportunity Fund) that holds at least 90% of its assets in Qualified Opportunity Zone property.
How do QOZ funds work? ›
QOZs are designed to spur economic development by providing tax incentives for investors who invest new capital in businesses operating in one or more QOZs. First, an investor can defer tax on any prior eligible gain to the extent that a corresponding amount is timely invested in a Qualified Opportunity Fund (QOF).
What are the requirements for a qualified Opportunity fund? ›
A Qualified Opportunity Zone business must earn at least 50% of its gross income from business activities within a Qualified Opportunity Zone. It must do so for each taxable year.
What is a opportunities fund? ›
An opportunity fund is an investment vehicle designed to invest in real estate or business development in areas known as “opportunity zones.” Opportunity zones are particular geographic areas that have been designated as economically distressed.
What is quality funds? ›
Quality investing is an investment strategy based on a set of clearly defined fundamental criteria that seeks to identify companies with outstanding quality characteristics. The quality assessment is made based on soft (e.g. management credibility) and hard criteria (e.g. balance sheet stability).
What does QOZ mean in real estate? ›
The Qualified Opportunity Zone program was creating in 2017 to encourage economic growth in low income communities, as identified by the US Census Bureau. Qualified Opportunity Zones provide tax benefits, including the free from capital gains tax incentive if the investments are processed through an Opportunity Fund.
What are the downsides of QOZ? ›
High Execution Risk
This risk is even more prevalent in ground-up developments. Some of the obstacles sponsors face include navigating regulations and executing business strategy/development. Finding a sponsor with the right experience and a stellar track record is critical for getting the job done.
Are QOZ funds a good investment? ›
Importantly, however, investors who hold QOZ investments for 10 years or more will still be able to avail themselves of favorable tax treatment of gains related to the QOZ investment, even if the gains are realized after 2026. Dec.
What are the risks of QOZ? ›
Assets are also at risk of foreclosure. If an investor invests in a QOZ via a 1031 exchange, they need to keep in mind that these exchanges are available from private placement offerings and are considered illiquid securities. There is no secondary market for these investments.
What is the minimum investment for QOZ? ›
In addition to investing 90 percent of assets within a QOZ, the businesses it holds must earn at least 50 percent of their gross income from activity within the zone. Furthermore, to be a QOZ business, at least 70 percent of the entity's tangible assets must be property owned or located in a QOZ.
To defer tax on an eligible gain, you must invest in a Qualified Opportunity Fund in exchange for equity interest (not debt interest) within 180 days of realizing the gain. In general, if you don't defer the gain, the gain would be recognized for federal income tax purposes the first day of the 180-day period.
Can anyone invest in a qualified opportunity fund? ›
A qualified opportunity zone fund can be established by any taxpayer by filing Form 8996 and submitting it with their federal income tax return. The purpose of this form is to certify individuals, partnerships or corporations as organizations for investing in qualified opportunity zones.
Can a qualified opportunity fund borrow money? ›
In addition, there is no prohibition on a QOF borrowing to partially fund (together with the taxpayer's equity investment in the QOF) the purchase of Opportunity Zone Property. Similarly, a partnership or corporate subsidiary of a QOF could borrow to help fund a project.
What is the type of opportunity fund? ›
Opportunity funds are nothing but a type of mutual funds that use the pooled money of investors to purchase stocks of companies with high opportunities for growth. But then, how are companies classified as having high growth opportunities? Here's where the mutual fund manager comes into the picture.
How do you decertify a qualified opportunity fund? ›
The election to decertify as a QOF is voluntary. If you make this election, you must attach a statement to the Form 8996 making this election along with the date of the election. The election to decertify becomes effective on the first day of the month after the month in which the QOF elects to decertify as a QOF.
What are the benefits of the QOZ fund? ›
The benefit of having a QOZ property is that federal capital gains taxes are deferred until the investor exits the investment totally or if the property is held 10 years or longer (see chart).
What are the tax benefits of a qualified Opportunity Zone? ›
The Qualified Opportunity Zone program offers taxpayers a potential federal capital gains tax incentive for investing in economically distressed areas of the US. The potential tax benefits include deferral, discount, and exemption from federal capital gains taxes.
