About Opportunity Funds

Opportunity Zones are a new powerful vehicle to defer, reduce and eliminate capital gains.

Introduction

US Tax Reform: Tax Reduction Strategies

The Tax Reform Act included an extraordinary tax break for investors. Investors can defer capital gains from the sale of any asset, reduce the deferred taxes over time, and eliminate taxes completely on new capital gains by investing in a Qualified Opportunity Fund.

What is an Opportunity Fund?

An Opportunity Fund is a new investment vehicle created as part of the Tax Cuts and Jobs Act of 2017 to incentivize investment in targeted communities called Opportunity Zones. Opportunity Funds are investment vehicles that invest at least 90% of their capital in Qualified Opportunity Zones. To capture the potential tax benefits offered by an Opportunity Fund, an investor must invest the gains from a 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 only has to roll in the gain or profits from the sale of the investment, not the original principal of the investment. Moreover, only the taxable gains rolled over into an Opportunity Fund are eligible to receive the tax incentives.

Why invest in Opportunity Funds?

Opportunity Funds allow investors to defer federal taxes on any recent capital gains until December 31, 2026, reduce that tax payment by up to 15%, and pay as little as zero taxes on potential profits from an Opportunity Fund if the investment is held for 10 years.

What are Opportunity Zones?

Opportunity Zones are census tracts designated by state and federal governments targeted for economic development.

Opportunity for all

The Program, although geared towards the current real estate community, institutional investors and developers, the advantages are not constrained to only these areas. It is seen as a boon to large owner-users and long term holders of commercial real estate ,as well as, any individual or corporation with a recent or upcoming capital gain, as they can benefit by rolling their gains into an Opportunity Fund or Opportunity Zone Business.

Opportunity Fund Requirements

  • Must be organized as a corporation or partnership for the purpose of investing in Qualified.
  • Opportunity Zone Property.
  • Opportunity Funds are the required investment vehicle to invest in opportunity zones.
  • Opportunity Funds must be certified by the US Department of Treasury.
  • Investors have 180 days to invest a capital gain into a qualified Opportunity fund that invests in opportunity zones.
  • There is no tracing requirement on the capital gain before it is invested.
  • Qualified Opportunity Zone property is property that is, stock, partnership interest or business property.
  • 90% of Funds assets must be in Opportunity zone.
  • Opportunity Fund investments in are subject to substantial improvement requirement.
  • Non-qualified business include casinos, golf courses, racetracks and other “sin” businesses.
  • Loans do not qualify as investments in opportunity zones or funds.

Real Estate Requirements

For real estate property to qualify as opportunity Zone property, the real estate property needs to have been acquired after December 31, 2017 and meet the following requirements

Substantial Improvement:

A property is substantially improved when capital improvements in the 31 month period following the acquisition to the property equal or exceed the purchase price of the property less land value. For example: Purchase property for 2 million. Land is worth 1 million. Must invest additional 1 million into property.

Original Use:

  • Still awaiting further details from Treasury for clarification
  • The opportunity fund must prove it is the first to use the property
  • In the case of raw land, original use commences with the development or improvement of the land

Opportunity Fund Business

Opportunity Zone Business:

  • Substantially all (70%) of tangible assets of the business must be owned or leased in an opportunity zone and at least 50% of gross income earned by the business must be from the opportunity zone.
  • For new businesses, at the time of purchase or creation, it must be set up as an opportunity zone business.
  • Most businesses qualify except for “sin” businesses.
  • Waiting for more clarification from Treasury on Technology firms or other firms that conduct business globally or nationally from within an opportunity to qualify.
  • Equity issued by any domestic corporation that is a Qualified Opportunity Zone Business

HOW DOES OPPORTUNITY FUND INVESTING WORK?

An investor who has triggered a capital gain by selling an asset like stocks or real estate can receive special tax benefits if they roll that gain into an opportunity fund within 180 days. There are three primary advantages to rolling over a capital gain into an opportunity fund:

  1. Defer

    The payment of Your capital Gains until dec 31, 2026.

  2. Reduce

    The tax you owe by Up to 15% after 7 Years.

  3. Pay Zero

    Tax on gains earned from the opportunity fund after 10 years.

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.

How Investing in an Opportunity Fund Works

To receive the most favorable tax treatment on their investment, investors are incentivized to hold their stakes in an Opportunity Fund over the long term, with the program providing the most potential upside to those who hold their investment for 10 years or even more.

Opportunity Fund Timeline

  • 2019

    Start: Year 1

    Features: Y1

    Roll over capital gains into opportunity fund

  • 2024

    Year 5

    Features: Y5

    Tax on original capital gains is reduced by 10%

  • 2026

    Year 7

    Features: Y7
    • Tax on original capital gains is reduced by and additional 5% for a total of 15%

  • 2027

    Year 8

    Features: Y8

    • April 15, 2027
    • Pay taxes on original capital gains (minus 15% reduction)

  • 2029

    Year 10

    Features: Y10

    • All capital gains taxes now eliminated on any opportunity funds profits

Investing in Opportunity Funds can provide three substantial potential tax advantages to investors:

  1. 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.
  2. Reduction of the capital gains tax realized – 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.
  3. No tax on any capital gains from an investment in Opportunity Fund –In the case of any investment in an Opportunity Fund held by a taxpayer for at least 10 years, the basis of such property shall be equal to the fair market value of such investment 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.

1031 Exchange vs Opportunity Funds :
A Better Alternative


Opportunity Fund Investment

1031 Exchange

Like Kind Property

Not Required

Required

Property Type

Can be real, personal,
business, land or stock

Real property only

Replacement Property

No requirement

Must be identified in 45 days

Amount invested

Capital gain only

Principal and capital gain

Other Type of investments

Allowed

Not Allowed

Recognition of deferred gain

12/31/2026 or sale of property

Once property is sold and not replaced

Reduction in capital Gain

10% held for 5 years, 15% if held 7 years
None

Elimination of Capital Gains

Gains on investment tax free after 10 years

None

Improvement or use

Substantially improve
None
Advantages HurdlesQuestions
Capital gains from any investment can be rolled into opportunity zones within 180 days of realization of gainInvesting in low income areas might not appreciate as much as investments in other areasWill the program be repealed by a change in political power
A business can lower its tax basis thru depreciation of assets in addition to the benefits of Opportunity zone Must be an accredited investor in order to invest in most fundsWill IRS agree to the stipulations made by US Treasury
Investments in certain opportunity zones has already begun, hence taking some risk out of investing in these low income communitiesInvestments in opportunity zones may be harder to leverage due to intenser scrutiny by lending institutionsConstruction may take longer than program is allowing. Need more guidance on penalties for not meeting timeline
Favors unrenovated buildings, land and newly owner occupied businesses in the O ZonesLocal building regulations and speed of the process could derail some investments and timelineWill the substantially improvement clause and time period of 31 months to complete project be extended due to development process