What are the benefits of investing in an opportunity fund?
Those who invest in opportunity funds in qualified opportunity zones become eligible for substantial federal tax advantages. Investors can defer and reduce realized capital gains on the invested principal and potentially eliminate the capital gains tax on returns earned through sale of the investment(s). Funds invested no earlier the December 31st, 2018 will qualify as part of the Opportunity Zones program.
When one sells an appreciated asset, a capital gain is realized. This would normally result in a tax being levied on the sale of the appreciated asset. If that capital gain was realized inside an opportunity fund, however, the seller (read: investor) is able to minimize the tax substantially.
What is an opportunity fund?
An opportunity fund is an investment vehicle (usually a U.S. partnership or corporation) that invests at least 90% of its capital in qualified opportunity zones. By investing gains from the sale of a prior investment (stock, bonds, real estate, a company) into an opportunity fund within 180 days of the sale of said investment, investors are able to receive substantial tax benefits. Investors only have to roll in the gain or profits from the sale of the investment, not the original principal of the investment.
The design of the fund allows investors to pool resources within opportunity zones to increase the amount of capital for investments selected by the manager. Only the taxable gains rolled over into an opportunity fund may receive the tax incentives.
What and where are opportunity zones?
The Opportunity Zones program provides tax incentives for capital gains on investments in specially designated areas. The program was created as part of the Tax Cuts and Jobs Act of 2017, which added a new section to the Tax code (26 U.S. Code § 1400Z) and aims to develop low-income communities in cities throughout the United States. A map of the nearly 9,000 designated opportunity zones in the U.S. can be found here.
How can you invest in an opportunity fund?
The are three recognized types of investments in opportunity zones that can be considered Opportunity Fund investments:
- Partnership interests in businesses that operate in qualified opportunity zones
- Stock ownership in businesses that conduct the majority of their operations within qualified opportunity zones
- Real estate or property located within qualified opportunity zones
There’s a bit more to it than that, though
While opportunity funds are an exciting and new investment vehicle, they can also be complex. There are specifically outlined qualifications opportunity funds must meet including:
- At least 90% of assets must be located and invested in qualified opportunity zone property;
- Properties only qualify if acquired after December 31, 2017
- Qualifying assets must be equity investments, not debt; and
- The original use of such property must commence with the opportunity fund, or the fund must substantially improve the property within 30 months of acquisition
As well, there’s more to investing in qualified opportunity zones than simply buying a cash-flowing asset and improving it in minor ways. The opportunity zones program was designed to limit the types of property invested in. Opportunity funds may only invest in the construction of new buildings, the renovation of unused buildings, or, each fund must invest more than it paid to purchase the building in property improvements within 30 months of the purchase date.
Invest confidently and with expertise
Over the coming months, the IRS and Treasury Department are set to release further guidance on the implementation of this program. Here at Yormack Law, we will follow these updates closely to ensure we’re ready to expertly serve all of your opportunity fund investments needs with expert opinions. Our team of industry-veteran lawyers stands ready to guide you through this process and maximize the benefits you receive for investing in opportunity funds. We believe the Opportunity Zones program will provide new advantages not available to other investments and will result in significant returns when implemented alongside the right investment strategy.
To best prepare for Opportunity Fund investing, ask questions, and learn more, contact us today at team@yormacklaw.com.
Yormack Law
Adam Yormack, Esq., is the principle attorney at Yormack where he focuses on corporate and commercial litigation, franchise, and real estate law. You can reach Adam directly at adam@yormacklaw.com.
Disclaimer
The materials in this article are provided for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any potential questions or concerns, etc.