Benefits and How They Work
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What Is an Opportunity Fund?
Qualified Opportunity Funds (QOFs) are investment vehicles for financially distressed areas known as opportunity zones. QQFs were established by the 2017 Tax Cuts and Jobs Act (TCJA) to boost investments in low-income or underdeveloped areas (the opportunity zones). Fund investments must focus on significant improvements within a designated timeframe to qualify for tax benefits. Tax incentives for investment included deferred or reduced taxes.
Key Takeaways
- Opportunity funds are investment vehicles created to boost economic growth in designated opportunity zones and offer tax incentives for investors who improve these areas.
- Designated opportunity zones are economically distressed areas, identified by individual states and certified at the federal level to receive special tax considerations.
- Investors can benefit from tax deferrals and exclusions on capital gains taxes if they reinvest in opportunity funds within a certain time frame
- There’s potential for increased benefits over extended holding periods.
- Not all types of businesses qualify for opportunity fund investments, as specific establishments such as golf courses and liquor stores are excluded, ensuring focus on revitalization projects.
Detailed Insights Into Opportunity Funds
The 2017 TCJA established opportunity funds to boost investment in underfunded, low-income communities. A community becomes an opportunity zone through state designation and IRS certification.
Corporations or partnerships can designate an investment fund as a qualified opportunity fund by filing IRS Form 8996. The fund must invest 90% of its assets in designated zones to get tax benefits.
How to Invest in Opportunity Zone Properties
Opportunity funds must significantly improve the properties they invest in. The TCJA defines these “substantial improvements” as investments that are equal to the original value paid by the fund. These must be made within 30 months. For example, if a property is purchased for $700,000, then the opportunity fund has a 30-month window to make at least $700,000 worth of improvements.
Certain types of businesses cannot be included in opportunity funds, even if they reside within opportunity zones. They include:
- Golf courses
- Country clubs
- Massage parlors
- Hot tub facilities
- Suntan facilities
- Racetracks or other facilities used for gambling
- Liquor stores
Important
Investors can defer their tax payments on prior investment gains if those gains are then invested in a qualified opportunity fund within 180 days after the sale. Taxes are then deferred to either the day when the opportunity fund investment is sold or exchanged, or Dec. 31, 2026—whichever comes first.
Tax Benefits of Qualified Opportunity Funds
Beyond the ability to defer taxation of previous gains, the longer a participant holds their qualified opportunity fund investment, the smaller their tax burden may be:
- If held for longer than five years, then investors receive a 10% exclusion of the deferred gain on their investment.
- If an investor holds for more than seven years, then they receive a 15% exclusion.
- After 10 years, the investor does not owe federal income taxes on the fund’s appreciation by the date of sale.
Given that opportunity funds are relatively new on the scene, and that the Trump administration that facilitated them is no longer in office, specific rules and regulations for investment in, and taxation of, qualified opportunity funds could be subject to change. Investors interested in participating should consult investment and tax professionals.
Locating Qualified Opportunity Zones: A Guide
Opportunity zones currently exist in all 50 U.S. states, as well as Washington, D.C., and five U.S. territories. To view all qualified opportunity zones, search the list below, or visit the U.S. Department of the Treasury for the most up-to-date listings.
Zones are identified by state, county, and census tract numbers. To determine the census tract number for a specific address, visit the U.S. Census Bureau’s Geocoder. Enter the address you’d like to find, and select “Public_AR_Current” from the drop-down menu of available datasets to search.
The Gulf Opportunity Zone, for example, was established for the area that was largely impacted by the storms surrounding Hurricane Katrina in 2005, including parts of Alabama, Louisiana, and Mississippi.
The Bottom Line
The primary purpose of opportunity funds is to channel investments into economically distressed areas, known as opportunity zones, with the aim of revitalizing those regions financially. The funds offer investors the chance to defer and potentially reduce taxes on their capital gains. Opportunity funds involve certain requirements, such as the commitment to make substantial improvements to properties and the prohibition of certain types of business investments. Though established by the 2017 Tax Cuts and Jobs Act, rules governing opportunity funds can change. These funds exist throughout all U.S. states, as well as in Washington, D.C. and select territories.
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