Qualified Opportunity Funds vs. Opportunity Funds - Invest in Opportunity Zones

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The Opportunity Zone program created in the 2017 Tax Cuts and Jobs Act established a framework for investing in Qualified Opportunity Funds. The term “Qualified Opportunity Fund” has caused a bit of confusion, asthe term “opportunity fund” has existed for decades.

Since there are significant tax advantages for investing in Qualified Opportunity Funds that do not exist for other types of opportunity funds, it’s important to understand the difference between the two types of funds.
 
What is a Qualified Opportunity Fund?

Qualified Opportunity Funds were created through legislation in the Tax Cuts and Jobs Act and are the only vehicle qualifying for tax incentives under the Opportunity Zone program.
 
According to the IRS:

  • A Qualified Opportunity Fund is a corporation or partnership that is formed with the express purpose of soliciting and investing funds into qualified Opportunity Zone property. Opportunity Zone property can be stock or partnership in a business operating primarily within an Opportunity Zone, an existing structure located in an Opportunity Zone, or a new development to be built in an Opportunity Zone.
  • Qualified Opportunity Funds must invest at least 90% of their assets in Opportunity Zone property to qualify for tax incentives.
  • A Qualified Opportunity Fund can accept untaxed capital gains, which then qualify for deferred and/or reduced capital gains tax payments. Although the concept of Qualified Opportunity Fundswas created to accept untaxed capital gains, there is nothing prohibiting Qualified Opportunity Funds from accepting other types of capital. All investments held for 10 years or more in a Qualified Opportunity Fund are exempt from capital gains tax on the increase.
  • Any taxpayer may take advantage of Qualified Opportunity Fund tax incentives. The IRS defines a taxpayer as an individual, S-corporation, C-corporation, partnership, trust, or other pass-through entity.
  • A Qualified Opportunity Fund may self-certify as such with the IRS as long as it has a written business plan stating its intent to invest in Opportunity Zone property.

Taxpayers who roll untaxed capital gains into a Qualified Opportunity Fund can defer capital gains tax payments until those gains until December 31, 2026, or the Opportunity Fund investment is sold, whichever comes first. In addition, after five years, there is a 10% step-up in basis, reducing the capital gains tax liability. If the assets are held for seven years, there is an additional 5% step-up in basis, for a total of 15%.

Taxpayers pay no capital gains tax on an appreciation of Qualified Opportunity Fund investments held for 10 years or more.
 
What is an opportunity fund?

Depending on the source, an opportunity fund can be defined as any one of the following:
 

  • A liquid savings account in which investment capital is held as potential deals are evaluated—a financial “war chest”
  • A non-profit organization that funnels capital to low-income individuals and communities. While these organizations accept donations, they are not considered investments.
  • Managed investment funds that invest in high-growth opportunities

If you are a taxpayer looking to take advantage of the benefits available under the Opportunity Zone program, you mustinvest in a Qualified Opportunity Fund.

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