OZ Pitch Day - March 7, 2024
Updated January 22, 2024
In general, there are two ways to invest in Opportunity Zones:
- Active QOF Investment: An investor who has realized a gain and wishes to take a hands-on approach to managing his next investment as a general partner, or GP, may create his own Qualified Opportunity Fund and invest his gain into this QOF to fund a property, business, or portfolio of assets. This is also known as a “captive” or “self-funded” QOF strategy.
- Passive QOF Investment: Alternatively, an investor may take a more “hands off” approach by investing his gains into a third-party Qualified Opportunity Fund that is raising equity from investors. This is similar to investing in a private equity fund as a passive limited partner, or LP investor.
Who Can Invest?
Opportunity Zone investing is most appropriate for High Net Worth investors and family offices who have U.S. tax liabilities resulting from capital gains and/or 1231 gains. This eligible gain may come from the sale of real estate, publicly traded stocks, bonds, mutual funds, and ETFs, privately held business, cryptocurrency, collectables, or nearly any other type of asset that would generate an eligible gain.
Practically speaking, passive Opportunity Zone investments (investing into a third-party fund as an LP investor) are best suited for taxpayers with at least $50,000 in eligible gains.
Active Opportunity Zone investments (creating a Qualified Opportunity Fund for the purposes of directly developing properties in an Opportunity Zone with one’s own gains as a GP investor) are most appropriate for High Net Worth investors and family offices with at least $250,000 in eligible gains.
Investors who reinvest taxable eligible gains into Qualified Opportunity Funds (QOFs) are eligible for the tax benefits of Opportunity Zone investing.
Non-gains dollars can be invested in Qualified Opportunity Funds, but are not eligible for any of the tax benefits.
In theory, the gain could be as little as $1. But in practice, a QOF investment may not be appropriate for investors with gain amounts under $50,000.
I say this for two reasons:
- There is some overhead to being an Opportunity Zone investor, in the form of additional tax forms that you’ll deal with every year, and additional fees that your CPA may charge you as a result.
- The minimum investment amount for most Qualified Opportunity Funds is usually at least $50,000, if not higher. Also note that due to SEC requirements, most funds are usually open only to accredited investors.
Aside from the eligible gains requirement, there are a few other considerations for potential Opportunity Zone investors.
One is the need for patient capital. In order to achieve the full tax benefit of Opportunity Zone investing, the Opportunity Zone investment must be held for a minimum of 10 years. A Qualified Opportunity Fund is an illiquid investment with a long lock-up period, often with little or no cash flow in the first several years.
The need for liquidity in 2027 is another consideration. An eligible gain can be deferred until December 31, 2026 if it is reinvested into a Qualified Opportunity Fund. But, the tax on this initial gain will come due in April 2027. Investors should plan accordingly for this deferred tax liability.
And finally, an investor should determine the suitability of such an investment within his/her portfolio. Your investment objectives, risk tolerance, and time horizon should be consistent with the characteristics of an Opportunity Zone investment, which tend to fall toward the higher risk end of the risk-return spectrum.
Opportunity Zone Investment Requirements
All qualifying Opportunity Zone investments must flow through an entity known as a Qualified Opportunity Fund (QOF). This is a new vehicle that was established in the OZ legislation in 2017.
In general, an investor has 180 days from the realization of their eligible gain to re-invest the gain (or a portion of the gain) into a Qualified Opportunity Fund (QOF).
Table Of Contents: Opportunity Zones Explained
- Chapter 1: Opportunity Zones Explained — The basics of the OZ program.
- Chapter 2: Opportunity Zone Tax Benefits — How the OZ tax break works.
- Chapter 3: A Brief History Of Opportunity Zones — Policy background on the OZ legislation.
- Chapter 4: Where Opportunity Zones Are Located — Includes the map of Opportunity Zones.
- Chapter 5: Two Ways To Invest In OZs — Active vs. passive options for investing.
- Chapter 6: How To Invest In Opportunity Zone Funds — QOF investments for passive LP investors.
- Chapter 7: How To Start Your Own OZ Fund — How to create a self-managed OZ fund.
- Chapter 8: Opportunity Zones vs. 1031 Exchanges — Two popular tax deferral programs.
- Appendix: The Best Opportunity Zone Resources To Learn More — Recommended links.