3 Things Every Opportunity Fund Investor Needs to Know
- Posted: March 18, 2019
- Posted by: Travis Lynk
- Last Reviewed: March 18, 2019
Now that the U.S. Department of the Treasury and the IRS have certified qualifying census tracts as Opportunity Zones, excitement is building among investors, fund managers, developers, and community leaders. The Opportunity Zone program is a promising tool for bringing private equity into communities that have been left behind in economic development.
For taxpayers, the incentives under the Opportunity Zone program are significant:
- Deferral of capital gains tax payments until December 31, 2026 (or the sale of the Opportunity Zone investment, whichever comes first)
- Reduction in capital gains tax liability of up to 15% for investments held for at least seven years
- Tax-free appreciation of qualifying Opportunity Fund investments held for 10 years or more
Aside from the financial benefits for taxpayers, the Opportunity Zone program also encourages socially responsible investment, deploying capital in communities in dire need of revitalization.
But before investing in Opportunity Zones, taxpayers should keep a few things in mind.
Understand the Requirements
The Opportunity Zone program runs on tax incentives; if you don’t meet the requirements, you could end up owing taxes you didn’t expect.
- Only capital gains from the sale or exchange of a qualifying investment are eligible for tax incentives under the program. If you sell an asset for $1,000,000 that you purchased for $500,000 five years ago, only $500,000 qualifies for favorable tax treatment. Assets must be sold to an unrelated third party to qualify.
- Individuals and partnerships have 180 days from the date of the transaction to roll untaxed gains into a Qualified Opportunity Fund. Partnership gains passed on to individual partners can be invested in the 180-day period after the transaction or within 180 days of the last day of the partnership’s tax year.
- To derive the maximum tax benefit under the law, funds should be invested in a Qualified Opportunity Fund no later than December 31, 2019, because the phantom gain date is December 31, 2026, and deferred capital gains tax payments become due, even if you still hold your Qualified Opportunity Fund investment. You should also plan to hold your investment for at least 10 years to realize maximum tax benefits.
Make Eligible Investments
If a Qualified Opportunity Fund fails to follow the IRS rules for qualifying funds, you will not be able to take advantage of the Opportunity Zone tax advantages. A Qualified Opportunity Fund must invest at least 90% of its assets in qualified Opportunity Zone property.
Three types of investments qualify as Opportunity Zone property:
- Partnership interests in a business operating within an Opportunity Zone
- Stock ownership in a corporation doing business in an Opportunity Zone
- Real estate located within an Opportunity Zone
If a fund invests in real estate development, the work must be completed within 30 months of the date of purchase. For existing structures, the cost of improvements must be equal to or greater than the purchase price of the structure.
Understand the Risks
As with any investment, it’s essential to do your due diligence on any Qualified Opportunity Fund you’re considering. If the fund has made public the name of the developer working on its Opportunity Zone property, look into the developer’s track record on other projects. Remember, there are mandatory timelines and asset tests for Qualified Opportunity Funds; failure to meet these requirements could disqualify the fund and jeopardize your tax incentives.
Investors will receive the maximum benefits from holding an investment for at least 10 years, but investors should still be knowledgeable about their rights and obligations for exiting the investment before 10 years have elapsed.