6 Things You Need to Know About Investing in Opportunity Zones
- Posted: January 3, 2019
- Posted by: Travis Lynk
- Last Reviewed: February 27, 2019
To take advantage of the Opportunity Zone Program, investors should understand how a Qualified Opportunity Fund(QOF)—the designated investment vehicle through which all capital must pass to reap tax benefits—functions.
QOFs must invest at least 90% of their assets in Qualified Opportunity Zone properties acquired after December 31, 2017. Properties must be used within a Qualified Opportunity Zone during substantially all of the QOF’s holdingperiod.
If you are interested in investing in a QOF, you should be mindful of severalissues surrounding the formation and function of Qualified Opportunity Funds.
Commitment of Funds
To take advantage of deferred and/or reduced capital gains tax payments, investors must commit realized gains to a Qualified Opportunity Fund within 180 daysof the date of saleor exchange of the qualifying asset.QOFs must commit at least 90% of their assets to Qualified Opportunity Zone property or risk potential penalties.
Organization and Self-Certification
Qualified Opportunity Funds must be organized as corporations or partnerships, and the QOF’s organizational documents should clearly state that its purpose is to invest in Qualified Opportunity Zone property. Under U.S. securities laws, interests in a QOF will be treated as securities.
There is no limit on the number of investors allowed in a fund, or on the amount of each investor’s contribution. Funds may limit their purpose to a specific area or asset, or encompass multiple Qualified Opportunity Zones and assets. A fund may be set up to develop or improve a single property, or to hold multiple developments across several different Opportunity Zones.
The program allows self-certificationas a QOF by completing a form from the IRS. No IRS approval is required, but the fund must submit the self-certifying paperwork with its tax return for the taxable year.
Opportunity Zone Property Limitations
QOFs are not limited in the number of assets they may acquire. However, Qualified Opportunity Zone property owned by the fund must be usedfor the first time, or substantially improved, within 30 months of acquisition.
The fund is not statutorily prohibited from using leverage to acquire property, but lenders to the fund are not entitled to the same tax benefits available to equity investors.
Sale and Disposition of Property
There is little regulatory guidance regarding the sale and disposition of Qualified Opportunity Zone property by a QOF:
- While there is no minimum holdingperiod forQualified Opportunity Zone property, there are potential tax issues involved in the sale of fund assets, including interest in Qualified Opportunity Zone businesses.
- The U.S. Departmentof Treasuryis required by the2017Tax Cuts and Jobs Act to issue guidance on how long a fund may hold cash from a sale of assets before it must be reinvested.
- QOFs must reinvest cash fromthesale of Qualified Opportunity Zone property assets within a“reasonable period of time” tomaintain compliance with the 90% test. However, the Department of Treasury has not yet definedwhat constitutes a reasonable time period for purposes of this program.
The QOF framework is substantially complete, and existing IRS self-certification guidance is taxpayer-favorable. However, several aspects of the Opportunity Zone program are open to interpretation and awaiting furtherguidance fromthe Department ofTreasury.