What Is an Opportunity Zone Fund?

Written by Ashley Sutphin Posted On Tuesday, 15 June 2021 00:00

Opportunity Zones are a way to invest in a property that’s located within a Qualified Opportunity Zone. A partnership or corporation can establish an Opportunity Zone Fund as a means of investing. These investments provide tax incentives.

The program came about as part of the 2017 Tax Cuts and Jobs Act. A new fund that makes investments in designated low-income communities resulted from the legislation.

So how does it work?

Opportunity Zone Funds

Opportunity Zone funds pool money from investors. Then, that money is used to invest in businesses as well as real estate projects in communities designated as economically distressed by the federal government.

There are more than 8,700 Opportunity Zones in nearly every major city in the country.

When an investor puts money in one of these funds, they can defer their taxable capital gains and eventually reduce them if they stay invested for long enough.

The zones were determined by the governors of each state based on growth potential and economic need.

The idea behind the program is to encourage capital injection into these zones to trigger economic growth.

Investment Structure

To be eligible for the tax incentives that make Opportunity Zone funds so appealing, an investor has to put their money in through a qualified fund. After a taxpayer sells or exchanges an asset, they can then take the cash equal to that gain for an interest in the Opportunity Zone fund.

An Opportunity Zone fund can invest directly or indirectly in a business that produces income in a designated zone.

Holding and then operating an apartment building is a good example of a potentially qualified opportunity. Shopping centers might also qualify, but then there are certain types of businesses that don’t qualify at all.

For example, golf clubs, country clubs, liquor stores, and massage parlors do not qualify.

Undeveloped land investments or developed land can qualify.

It’s a Long-Term Investment

If you’re looking for a short-term investment, then an Opportunity Fund probably isn’t right for you. The longer your investment is held in the fund, the more you can reduce your rolled-over gain that’s going to end up being subject to taxation.

If you hold the fund for five years, you get a 10% reduction in your gains that you’ll pay taxes on. If you hold it for seven years, you get an additional reduction of 5%.

However, in December 2026, no matter when you invested, you have to pay federal capital gains taxes owed on your profits that you put into the fund.

If you hold onto your investment for 10 years, then your gains are tax-free if you made money from capital gains in a previous investment.

Currently, funds range in asset size from under $1 million up to $3 billion. They’re mostly run by real estate developers and money management firms.

You have to be an accredited investor to participate in the majority of Opportunity Zone funds, meaning you have a net worth of at least $1 million, not including your primary home.

Many of these funds also require a six-figure investment.

It’s an interesting concept, although not without flaws. Namely, there are complexities with the IRS guidelines, and in order to be eligible for tax benefits, the fund has to be com

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