How Do Opportunity Zone Funds Work?
Opportunity Zone Funds allow investors to give back to communities as well as earn some impressive tax incentives. There are over 8,760 qualified opportunity zones throughout the United States. Read on to learn what they are and how to invest in one.
Before we get started, let’s break down some common terms.
Common Opportunity Zone Funds Terms
What is a QOZ?
A QOZ is a Qualified Opportunity Zone. A QOZ is an area that the federal government recognizes as low-income and in need of an influx of capital.
What is a QOF?
A QOF is a Qualified Opportunity Fund. The key is the Q in QOF; you have to qualify, register, and then invest within a set period of time. QOFs are investment vehicles organized to drive investment in the opportunity zones.
What is a QOZP?
A QOZP is a Qualified Opportunity Zone Property – you don’t have to own that property outright to invest; it just has to be doing business “primarily” in a QOZ.
What is an Opportunity Zone?
An opportunity zone is an economically disadvantaged and/or low-income community that could benefit from investments and revitalization. Under strict conditions, investments in these communities could be eligible for tax incentives through the Tax Cuts and Jobs Act of 2017.
How Does an Area Qualify as an Opportunity Zone?
According to the IRS, for an area to qualify as an opportunity zone, it must be characterized by either of the following:
- A median household income of less than 80% of the median household income of its neighbors, or
- A poverty rate of at least 20 percent.
What is the Purpose of Opportunity Zones?
The goal of opportunity zones and their associated tax incentives is to encourage long-term investments in distressed communities. These investments can lead to the creation of more local jobs and economic growth.
What Are The Incentives of Investing in an Opportunity Zone Fund?
Three tax incentives of investing in an Opportunity Zone Fund are:
- Defer federal capital gains taxes owed today for a period of years
- Be eligible to receive a reduction in those capital gains taxes
- Be exempted from paying future capital gains taxes if certain investment criteria are met.
How Are Qualified Opportunity Funds Started?
According to the IRS, Qualified Opportunity Funds can be started by real estate investors through several methods, such as:
- Partnerships
- Limited Liability Companies (LLCs)
- Corporations
And, an entity must:
- File a federal income tax return
- Be organized to invest in qualified opportunity zone property
- Hold 90% of its assets in qualified opportunity zone property
Read how to attract investors to your opportunity zone, here.
How Do Opportunity Zone Funds Work For Investors?
Opportunity zones provide tax incentives to investors with capital gains. Investors get their money back when the value of the property goes up to fair market value.
When the investor sells in ten years, the capital gains tax they would have paid is forgiven as a big “thank you” from the government for investing in the low-income area.
What Are the Benefits of Investing in an Opportunity Zone Fund?
Through investing in opportunity zone funds, investors can reduce the total they pay in capital gains tax. Further, if they keep the property for ten years or more, the investor won’t pay taxes on the appreciation value.
How to Invest in An Opportunity Zone Fund
According to the IRS, investors must transfer cash or property to the fund in order for the full investment to be eligible for tax benefits. Additionally, investors must meet annual investor reporting requirements and time their investment within 180 days of realizing capital gain to receive the tax benefit.
Consider working with a tax or financial advisor to help you file the correct paperwork, ensure you’re following the appropriate rules and regulations as well as guide you through the process of investing in an opportunity zone fund.
How to Find Opportunity Funds to Invest In
When researching opportunity zones and opportunity funds, investors may be met by a series of hypotheticals but find very few funds that are actively looking for investors. This happens because opportunity funds are excellent tax protection vehicles–and you have to be in the club to get on board.
What investors won’t see is how easy it is to become a registered opportunity fund. It’s well within the scope of possibility for most high-net-worth investors.
Interested in being part of our OZF? We should talk.
