Qualified Opportunity Funds (QOFs) are the vehicles that investors can use to participate in the Opportunity Zone program, which was created by the 2017 Tax Cuts and Jobs Act (TCJA). Opportunity Zones are federally designated areas in need of economic growth and investment. In exchange for directing investments in the targeted regions, taxpayers can defer and reduce their taxes on invested funds under certain circumstances. Here is how the program works:
The TCJA established rules governing Qualified Opportunity Funds as well. It must be set up as a corporation (LLC or C corporation is acceptable) or partnership to invest in QOZs. The QOF must file a Form 8996 annually and invest more than 90% of its assets in a designated opportunity zone.
Those investments can include property, equipment, and businesses, and at least 50% of the gross income must result from activities within the opportunity zone. In addition, from a practical standpoint, a QOF must satisfy the "original use" or "substantial improvement" test that is part of the opportunity zone requirements. The requirements include:
Development of residential and commercial properties are common activities in QOZs, including rehabilitation of damaged homes for rental use and improvement of office and retail properties. Environmental and energy projects are also frequent, including clean energy and alternative farming enterprises.
While a REIT (Real Estate Investment Trust) can invest in a Qualified Opportunity Fund, just as other corporations and individuals can, the obverse is not available in that a REIT is not an eligible destination for the targeted investment of a QOF.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions.