Investing in Opportunity Funds: What You Need to Know
An Opportunity Fund is an investment vehicle specifically designed to facilitate into investment into designed low-income areas called Opportunity Zones. These funds allow investors to take advantage of a variety of tax incentives, including permitting them to defer their capital gains taxes until 2027. Opportunity Funds can be created by individual investors, who can place their own funds inside an Opportunity Fund, or by larger organizations, which can advertise these funds to private investors or to the general public.
What are the Requirements of Investing in an Opportunity Fund?
In order to take advantage of the capital gains tax deferral benefits of Opportunity Funds, an investor must place their money in a fund within 180 days of the sale of their assets. The fund itself must invest those funds in qualified assets within 6 months of receiving them from investors. Qualified assets include real estate and businesses located within a Qualified Opportunity Zone (QOZ). Funds may not invest in certain “sin” businesses, such as massage parlors, tanning salons, liquor stores, and horse-racing track. A fund needs to invest 90% of its funds in qualified assets, and will be subject to twice a year asset tests from the U.S. Department of the Treasury. -In addition, no more than 20% of the fund can be held by anyone financially affiliated with the fund (i.e. someone who has sold land or property to the fund in exchange for a partnership interest. However, the rules on this are still somewhat unclear.
What are the Benefits of Investing in an Opportunity Fund?
Investors who sell capital gains tax-eligible assets (i.e. stocks, bonds, real estate) and reinvest the funds in an Opportunity Fund can defer paying those capital gains taxes until April 2027. If they keep their investment in the Opportunity Fund for at least 5 years, they can achieve a 10% discount on their capital gains tax liability, while if they keep their investment in the fund for at least 7 years, they can achieve an additional 5% discount, for an overall 15% reduction in capital gains tax liability. Investments held in a fund for a least 10 years can avoid paying capital gains taxes on any profits generated from the Opportunity Fund itself.
What is the Structure of an Opportunity Fund?
Opportunity Funds can be structured in a few different ways. Generally, the fund itself is a partnership or corporation. While LLCs are usually allowed, single member LLCs typically are not. In many cases, a fund may wish to hold the property directly. In other cases, an Opportunity Fund may hold an interest in a partnership or corporation, which itself holds the property located in the Opportunity Zone. This joint venture/two-tiered structure allows for investors to reduce risk and pool resources for larger projects.