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Updated October 29, 2020
The Opportunity Zone policy initiative is the biggest economic development program in U.S. history — and the tax incentive of a lifetime. This guide provides comprehensive information on how Opportunity Zones have the power to catalyze positive social impact, and how you can reap massive tax savings by investing in Qualified Opportunity Funds.
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Table of Contents
How the rise of inequality in America paved the way for several place-based policies over the years, leading to the Investing in Opportunity Act, a modified version of which was passed as part of the Tax Cuts & Jobs Act of 2017.
Chapter 2: The Investing in Opportunity Act
The Investing in Opportunity Act is the legislation that defines Internal Revenue Code Section 1400Z, otherwise known as the Opportunity Zones tax incentive. The Congressional intent of the policy is to redirect private capital into under-invested, economically distressed communities.
Chapter 3: What are Opportunity Zones?
The newly created Section 1400Z of the Internal Revenue Code defines “Qualified Opportunity Zones” as low-income census tracts that were nominated by state governors and certified by the U.S. Treasury as Qualified Opportunity Zones.
Chapter 4: What are Qualified Opportunity Funds?
A Qualified Opportunity Fund is any investment vehicle organized as a partnership or corporation for the purpose of investing in at least one Qualified Opportunity Zone. A Qualified Opportunity Fund must hold at least 90 percent of its assets in Qualified Opportunity Zone Property. Learn how to invest.
In the appendix to this guide, several examples demonstrate the tax savings potential of investing in Opportunity Zones, and the resulting impact on investment returns.
Tax incentives for Qualified Opportunity Zone Funds
An investor who is subject to capital gains as the result of an asset sale can take advantage of the tax incentives of investing in a Qualified Opportunity Zone Fund, so long as the investment is made within 180 days of the recognition date.
Note 1: For investors who recognize a capital gain through a partnership Schedule K-1, the recognition date for the purposes of Opportunity Zone investing is the due date for the partnership’s federal tax return, typically March 15 of the following year. For example: a partnership realizes a capital gain on September 1, 2020. The gain is reported on the partner’s Schedule K-1 by March 15, 2021. The partner would have until September 11, 2021 (March 15 + 180 days) to re-invest his gains into a Qualified Opportunity Fund.
Note 2: In June 2020, the IRS issued Notice 2020-39, which extended the 180-day deadline to provide taxpayers affected by the coronavirus pandemic with additional relief. The notice states that for any 180-day period that ends on or after April 1, 2020 and before December 31, 2020, the investment deadline is automatically extended to December 31, 2020.
The gain can come from any type of asset sale — typically real estate; publicly traded securities such as stocks, bonds, mutual funds, ETFs; the sale of a privately held business; collectibles; or crypto assets, including Bitcoin.
Taxpayers who rollover their capital gains into a Qualified Opportunity Fund can benefit from three tax benefits — deferral, reduction, and exclusion.
- Deferral of capital gain recognition from the original investment until December 31, 2026.
- Reduction of capital gain recognition from the original investment. The amount of capital gain recognized from the original investment is reduced by 10 percent after achieving a 5-year holding period, so long as the 5-year holding period is achieved by December 31, 2026. There was also a 7-year hold incentive that reduced capital gain recognition on the original gain by 15 percent, but this expired on December 31, 2019.
- Exclusion of capital gain recognition on Qualified Opportunity Zone Property held for at least 10 years, so long as the gain from the Opportunity Zone investment is recognized by December 31, 2047.
How to invest in Qualified Opportunity Zone Funds
Anyone with capital gains may invest in Opportunity Zone Funds. In practice, most Qualified Opportunity Funds that are raising money from outside investors have filed for an SEC exemption under Regulation D, Rule 506(b) or 506(c). As such, they have limited their offerings to accredited investors only. With some exceptions, an accredited investor is an individual with annual income of at least $200,000 (or $300,000 of joint income with spouse) over the last two years, or net worth exceeding $1 million (not including primary residence).
Investment minimums in most Qualified Opportunity Funds that are seeking outside investment are often in the 5- or 6-figure dollar range. Typical investment minimums can range from $25,000 to $100,000, with some funds requiring a minimum investment of $250,000, or even $1 million.
Hundreds of such funds exist, with varying investment strategies. A list of Opportunity Zone funds is available on OpportunityDb.com. In general, Qualified Opportunity Funds are private placement funds that do not trade publicly on an exchange. While hundreds of funds are available directly to accredited investors, many funds are available only through wirehouse or RIA platforms. And many thousands more are self-funded or privately held funds that are not seeking capital from outside investors.
If you have your own real estate deal located in an Opportunity Zone or business that is capable of having a presence in an Opportunity Zone, you may wish to create your own self-funded Qualified Opportunity Fund. Visit OZPros.com for information about how you can get started with forming your own Qualified Opportunity Fund and/or Qualified Opportunity Zone Business.
Disclosure: The author of this guide has ownership in OZPros.com.