Opportunity Zone funds are a way to attract investment to low-income areas and stimulate community development. Learn how they work and how they can impact the community.
With the passing of tax reform legislation in December 2017, economically challenged communities received a new investment tool: the opportunity zones incentive. The incentive permits taxpayers to defer capital gains taxes until 2026 if those profits are reinvested in opportunity funds, which are equity funds that invest in businesses in opportunity zones.
The opportunity zones incentive provides incentives for the investor to invest in capital-starved urban and rural areas that typically have relied upon investments from philanthropic organizations, federal, state, and local governments, and financial institutions.
Keep reading about how Opportunity Zone Funds are developing communities around the US and how you can be a part of it.
Background of Opportunity Zone Funds
An opportunity fund is an investment vehicle created to invest in opportunity zone properties. Any entity can establish an opportunity fund if it follows guidelines set by the statute and is self-certified according to guidance from the U.S. Department of the Treasury.
An opportunity fund must hold at least 90 percent of its assets in qualified opportunity zone businesses and/or business property. If the opportunity fund fails to meet the 90 percent requirement, it must pay a penalty for each month it fails to meet the investment requirement. Opportunity funds can be formed as a partnership or corporation to raise capital from investors.
The benefit to an investor in an opportunity fund is the ability to defer paying tax on gains if those gains are invested in qualified opportunity funds. To qualify, the gain must be invested in a qualified opportunity fund during a 180-day period that begins on the date of the sale or exchange that generated the gain. The deferral is temporary, as the gain must be recognized on the earlier of Dec. 31, 2026, or the date the investment in the opportunity fund is sold or exchanged.
Impact of Opportunity Zone Funds on Low-Income Community
Investments in opportunity zones stand to significantly help distressed communities since estimates of the unrealized gains held by investors are in the trillions of dollars. Even a fraction of this amount in the form of equity investments in businesses, real estate, and business assets located in qualified opportunity zones could have a significant impact.
The benefits include new or existing businesses expanding within or into opportunity zones and real estate development or rehabilitation of vacant or abandoned properties. Opportunity zone investments will bring much-needed commercial and community goods and services to areas, develop or preserve affordable housing, and provide myriad other benefits to low-income communities.
The Opportunity Zone initiative represents one of the most novel federal tax incentives enacted around community revitalization. Investing in a QOF may provide economically distressed areas with potentially significant funds and job growth while providing investors/taxpayers with tax incentives to participate in the program. But caution should be taken when evaluating available QOFs to determine if the fund is suitable for seeking tax incentives.