Passed as part of the Tax Cuts and Jobs Act of 2018, the Opportunity Zone program gives investors a tax break in exchange for investments in low-income communities in census tracts designated by each state’s governor.
The Opportunity Zone program gives investors a tax break similar to that of a 1031 exchange, allowing investors to invest capital gains in so-called “Opportunity Zones”. Investing into an Opportunity Zone reduces, and in some cases eliminates, the taxes owed on those capital gains.
o Investors have 180 days to invest into the QoF (Qualified opportunity Fund).
o Investors who maintain a hold period of five years in a qualified Opportunity Zone investment gain a 10% reduction on capital gains taxes. Those who hold for seven years gain a 20% reduction.
o Investors who hold their investment for 10 years reduce their capital gains taxes to zero (not only on the original capital gain invested in Opportunity Zone as principal, but also on any gains accrued from the Opportunity Zone investment).
For example, an investor can sell stock and invest the capital gains into an Opportunity Zone. This would eliminate the taxes on the capital gains from selling the stock. Furthermore, any gains from the Opportunity Zone investment would be excluded from Capital Gains taxation. Opportunity Zone investments require improvement of the properties. When investors buy a property, they must invest more than 100% of the value of the building (in order to fund improvements).
One persistent question: what qualifies as an opportunity fund—the investment vehicle for an opportunity zone investment. Who can start one? What are the requirements?
o The proposed regulations generally permit any taxpayer that is a corporation or partnership for tax purposes to self-certify as a Qualified Opportunity Fund, provided that the entity self-certifying is statutorily eligible to do so.
o Investors need not be attached to a big fund run by a bank or a private equity firm.
o Investors simply need to self-certify, fill Form 8996, and attach it to their federal income tax return.
Investors seeking to benefit from Opportunity Zone projects should partner with knowledgeable operators and fund managers:
o The areas within opportunity zones vary and can be vastly different. Some have already gentrified while some are lagging far behind.
o Investors often do not possess adequate knowledge of the market in general and Opportunity Zones in particular.
Developers that have projects in Opportunity Zones and are that trying to connect to investors should note:
• Cash out refinance is allowed. At the same time, there are exception and exclusions such as death, gifting
• QoF can still do a 1031 exchange. QoF have 34 months to invest the fund.
• 98% of the funds need to be invested in the QoF.
