Understanding Opportunity Zone Funds

Published on 04 Jul 2021

White paper - Understanding Opportunity Zone Funds

In 2018, the United States introduced new tax reforms. The reforms introduced many changes. One of these changes was the creation of a new investment category: Opportunity Zones. The reforms introduced tax incentives that would encourage investors with capital gains to invest in low-income and undercapitalized communities.

Investors looking to defer or avoid capital gains taxes on the sale of certain investment properties can invest in Qualified Opportunity Zone funds. There is a lot of interest from investors in these funds. However, the IRS is still clarifying and providing guidance on the exact rules that apply to this investment opportunity. Download this white paper by Wealth Forge to learn more about opportunity zone funds, compare them to other tax-advantaged investments, and understand what financial professions should know before recommending these investments to clients.

See also: Improving the Alternative Investment Client Experience

What are opportunity zones?

Every US state and territory defines opportunity zones. Typically these are economically distressed areas. The zones are certified by the US department of treasury. Currently, there are 8,700 opportunity zones across the United States. Most often, opportunity zone properties are new constructions. Under certain circumstances, a pre-existing property in an opportunity zone may qualify for the tax benefits. If a fund is investing in an existing property, it must make 'substantial improvements to it. 'Substantial improvements' is defined as equal to the fund's initial investment in the property over the coming 30 months. For example, a fund invests $5 million in an existing property in an opportunity zone. It must spend an additional $5 million to improve the property within the coming two and half years. Some types of properties, like golf courses and gambling establishments, do not qualify for opportunity zone investments. Depending on how long the investment is held, the IRS says that investing in opportunity zone funds can have significant tax advantages and savings for the investors.

3 Tax Advantages of opportunity zone investments:

  1. Tax deferral: Taxes on capital gains that are reinvested into an opportunity zone can be deferred until December 2026
  2. Tax basis step-up: If the investment is held for 5 years, 10% of the gains invested become tax-free due to a step-up in tax basis
  3. No tax on appreciation: The ultimate goal of opportunity zone funds is to appreciate in value and provide a return. If an investment is held for 10 years, investors will not have to pay any taxes on gains earned from the investment

The white paper contains further examples of how the tax benefits would play out. It also provides information on the guidance provided by the IRS regarding opportunity zone investments. Subscribe to Whitepapers.online for quality resources on finance and tech.


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