What is an Opportunity Fund?
Opportunity Funds are investment vehicles that invest at least 90% of their capital in Qualified Opportunity Zones. This model enables investors to pool their resources in Opportunity Zones, increasing the scale of capital going to investments.
What are the tax benefits of an Opportunity Fund?
Investing in Opportunity Funds can provide three potential tax advantages to investors:
- Deferral of capital gain – A tax deferral for any capital gains rolled over in an Opportunity Fund. The deferred gain would be recognized on the earlier of December 31, 2026 or the date on which the investment in the Fund is sold.
- Reduction of capital gain – A step-up in basis for capital gains rolled into an Opportunity Fund. The basis of the original investment is increased by 10% if the investment is held by the taxpayer for at least 5 years, and by an additional 5% if held for at least 7 years. In other words, if by December 31, 2026 an investor has held an investment in an Opportunity Fund for 7 years, then the tax on the initially deferred gain is expected to be reduced by 15%, or reduced by 10% if by then held for only five years.
- No tax on capital gains from the Opportunity Fund investment– If an investment in an Opportunity Fund has been held by a taxpayer for at least 10 years, the basis of the property will be equal to the fair market value on the date that the investment is sold or exchanged. In short, after 10 years, thereafter there would be zero federal capital gains tax on profits from the sale of an investment in an Opportunity Fund.
What is an Opportunity Zone?
Opportunity Zones are census tracts, nominated by governors and certified by the U.S. Department of the Treasury, into which investors can invest in new projects intended to spur economic development in exchange for certain federal tax benefits. The first set of Opportunity Zones were designated on April 9, 2018. Opportunity Zones have now been designated covering parts of all 50 states, the District of Columbia and five U.S. territories.
Where are Opportunity Zones located?
The list of designated Qualified Opportunity Zones can be found on our website.
Why are Opportunity Funds and attractive investment?
By investing into an Opportunity Fund, investors can not only defer and reduce their existing capital gains tax liability, but also eliminate future capital gains tax on returns earned from the Opportunity Fund.
What is the purpose of an Opportunity Fund?
The purpose of Opportunity Funds is to promote economic development in certain areas and communities, known as Opportunity Zones, by offering investors substantial federal tax advantages.
How do you invest in an Opportunity Fund?
An investor must invest the gains from the sale of a prior investment (e.g., stock, bonds, real estate, a company) into an Opportunity Fund within 180 days of the sale of that investment. The investor is only required to roll in the gain or profits from the sale of the investment, not the original principal of the investment. Only the taxable gains rolled over into an Opportunity Fund are eligible to receive the tax incentives.
What is an example of Opportunity Fund investment?
What types of investments qualify for an Opportunity Fund?
- At least 90% of assets must be located and invested in qualified opportunity zone property
- Properties only qualify if acquired after December 31, 2017
- Qualifying assets must be equity investments, not debt
- The original use of such property must commence with the Opportunity Fund, or the fund must substantially improve the property within 30 months of acquisition
What kinds of gains, other than capital gains, can be rolled into an Opportunity Fund?
Only capital gains are eligible for the tax benefit.
What type of entity does an Opportunity Zone need to be? How does it become certified?
An Opportunity Fund is a privately managed investment vehicle organized as a corporation or a partnership for the purpose of investing in qualified opportunity zone property. To become a Qualified Opportunity Fund, an eligible corporation or partnership self certifies. To self-certify, a corporation or partnership completes a form and attaches that form to its federal income tax return.
How much time does an Opportunity Fund have to deploy the capital it has raised?
What is an Opportunity Fund business?
How is tangible property treated for an Opportunity Zone business?
At least 50 percent of gross income must be derived from the active conduct of a trade or business within an Opportunity Zone. Likewise, at least 70% of intangible property must be used in the active conduct of a trade or business within an Opportunity Zone.
What is the Tax Cuts and Jobs Act (TCJA) of 2017?
On December 15, 2017, the U.S. government released a unified version of the Tax Cuts and Jobs Act. The Tax Cuts and Jobs Act reformed the individual income tax code by lowering tax rates on wages, investment, and business income; broadening the tax base; and simplifying the tax code. Opportunity Zones were originated from this legislation.
Do you need to be a US resident invest in Opportunity Funds?
Can you use an existing entity as an Opportunity Fund?
Pre-existing entities can qualify as Opportunity Funds or Opportunity Zone businesses as long as they satisfy the necessary requirements.
How do I elect to defer my gain on the 2018 sale of the stock?
You may make an election to defer the gain when filing your Federal Income Tax return. That is, you may make the election on the return on which the tax on that gain would be due if you do not defer it.
Is the tax treatment of Opportunity Zones in Puerto Rico considered foreign?
What does the average Opportunity Zone look like?
Opportunity Zones are home to 31 million people. Over three-quarters of certified tracts lie within metropolitan areas, but Opportunity Zones are nearly evenly split between high density urban zip codes and low density rural ones, with the remaining 22 percent in medium density suburban communities
Where can I find the IRS proposed regulations from October 2019?
How does the 90% asset rule work?
An Opportunity Fund must value its assets for purposes of the 90-percent asset test using values reported on the fund’s audited or filed financial statements, on the last day of the fund’s taxable year.
What is the start date to be declared an Opportunity Fund?
Opportunity Funds will be able to choose the first month in which they are treated as an Opportunity Fund.
When do Opportunity Zones expire?
Though Opportunity Zone designations expire at the end of 2028, investors can keep their investments in funds through 2047 without losing any of the tax benefits, even if the zone loses its eligibility in the interim.
How can I find the exact census tract number for a specific address?
You can find 11-digit census tract numbers using [our tool] the U.S. Census Bureau’s Geocoder.
How is working capital treated
Do I need to live in an Opportunity Zone to take advantage?
No. You can get the tax benefits even if you don’t live, work or have a business in an Opportunity Zone. All you need to do is invest a recognized gain in a Qualified Opportunity Fund and elect to defer the tax on that gain.
Who can defer tax by investing in opportunity funds?
Any individual, corporation, or trust, whether foreign or domestic. This includes Qualified settlement funds and Disputed ownership funds.
Is there a limit to the amount of capital gains a tax payer can defer?
When are the deferred gains on my initial roll-over taxed?
The deferred gains are taxable when the investment in the Opportunity Fund is sold or, if earlier, on December 31, 2026.
What happens if an Opportunity Zone investment is sold at a loss?
Only the actual gain realized is taxable.
What is Opportunity Zone phantom income?
Is there a difference between and ‘Opportunity Fund’ and a ‘Qualified Opportunity Fund’?
Can an Opportunity Fund invest in another Opportunity Fund?
What happens if an Opportunity Fund fails the 90% test?
If the O Fund fails the 90% test in any year, it is required to pay a penalty for each month in which it fails to meet the requirement.
How much must one improve assets held by an Opportunity Zone?
How are roll-over capital gains of partnerships or other pass through entities treated?
A partnership may elect to defer all (or part) of a capital gain. If an election is made, the elected deferred gain is not included in the distributive shares of the partners. If the partnership does not elect to defer gain, a partner generally may elect its own deferral with respect to the partner’s distributive share. The partner’s 180-day period generally begins on the last day of the partnership’s taxable year.
What is an Opportunity Zone business?
To qualify as an OZ business, at least 70% of a partnership or corporation tangible property owned or leased must be qualified opportunity zone business property XXXXXX
Can a pre-existing entity qualify as a QOZ?
Preexisting entities can qualify as QOFs or OZ businesses, providing they satisfy the necessary requirements.
What happened is an OZ designation expires?
The ability to make the 10-year basis step-up election at sale of the QOF investment is preserved under the proposed regulations until Dec. 31, 2047.
How is “substantial improvement to a building” defined?
- A substantial improvement to the building is measured by the QOF’s additions to the adjusted basis of the building (excluding the land).
- The QOF is not required to separately substantially improve the land upon which the building is located.
- to ‘‘substantially improve’’ a property, an O Fund (or subsidiary) must make additions to basis with respect to such property during a 30-month period in the hands of the O Fund (or subsidiary) that exceed the basis at the beginning of the 30-month period.
What are the types of Qualified Opportunity Zone property?
- Qualified Opportunity Zone stock: any stock in a domestic corporation acquired by the fund after December 31 2017 at its original issue solely in exchange for cash; at the time the stock was issued, the corporation was a QOZ business; during substantially all the QO fund’s holding period of the stock, the corporation was a QOZ business.
- Qualified Opportunity Zone partnership interest: any capital or profits interest which was acquired by the fund after December 31 2017 from the partnership solely in exchange for cash; at the time the interest was acquired, the partnership was a QOZ business; during substantially all the fund’s holding period the partnership was a QOZ business.
- Qualified Opportunity Zone business property: tangible property used in a trade or business of the QO fund and was acquired by the QO fund by purchase after December 31, 2017; the original use of the QO zone business property commences with the QO fund or the QO fund substantially improves the property; during substantially all the QO fund’s holding period of the property, substantially all the property was in a QO Zone.
- A substantial improvement to a property occurs if during the 30-months period after the date of the acquisition of the property, additions to the basis of the property in the hands of the qualified Opportunity Fund exceed the basis of the property at the beginning of the 30-months period.
How is an O Fund certified?
A taxpayer must self-certify an O Fund by filing an election with their tax return. No approval or action by the IRS is required.
What other requirements are there to form an O Fund?
In most cases, the formation of an O Fund will involve only filing a certificate of formation to create a limited liability company, drafting an appropriate operating agreement, and, if necessary, preparing offering documents. There are no restrictions on who may organize, own, or manage an O Fund. Many O Funds will likely be single-investor funds in which a taxpayer who recognized a gain forms their own fund that they control to invest in projects they select. At the other end of the spectrum, there likely will also be multi-investor funds in which a sponsor raises funds from several taxpayers who have recognized gains and invests those funds in projects selected by the sponsor.
How much time does an O Fund have to invest proceeds into O Fund Property?
The only time requirement provided in the statute are two specified dates on which, on average, the O Fund must have at least 90% of its assets invested in O Fund Property.
How do you determine who is the investor in an O Fund?
Where an individual or C corporation sells property at a gain, it is clear that such individual or C corporation must be the person that makes the investment in the O Fund. However, where a partnership or S corporation is the seller, it remains unclear as of October 2018 if the pass-through entity, the partner or shareholder in the pass-through entity, or both, may be the investor.
What types of projects/property are eligible investments?