The Opportunity Zones Program has provided a way to direct billions of dollars of capital toward urban renewal and revitalization projects in designated Qualified Opportunity Zones. Those investing in Qualified Opportunity Funds (QOFs) can also benefit from certain tax advantages.
But can anyone invest in opportunity zones? Or more specifically, can anyone invest in the Qualified Opportunity Funds that direct monies toward QOFs?
The simple answer is that anyone with capital gains from the sale of capital assets could, in theory, invest in QOFs. The idea behind the program is that capital gains invested in QOFs could provide capital gains tax deferrals for investors.
The more complex answer is that most QOFs require a large influx of capital from outside investors. In many cases, $250,000 is the minimum required investment in a QOF. As such, most QOF sponsors limit their offerings to accredited investors.
Accredited investors have special status under financial regulations laws. They include individuals that have:
- Income exceeding $200,000 in each of the two most recent years or joint income with a spouse that exceeds $300,000 for those same years (with the expectation that this will continue), or
- A net worth (or joint net worth with a spouse) that exceeds $1 million, or
- Assets under management of $1 million or above, excluding the value of a primary residence
Another is that QOFs are considered securities. As such, many QOF sponsors register these funds with the Securities and Exchange Commission (SEC). Under this registration, QOFs aren’t available on the open market. Rather, they’re offered through investment advisors or broker-dealers. These entities also only target accredited investors, for the most part.
So what happens if you’re a non-accredited investor who wants to invest in QOF? It is possible to form your own QOF. But doing so means adherence to extremely stringent IRS requirements.
You’d need to set up an entity (a partnership or corporation) with the sole purpose of investing in QOZ properties. You’d need to ensure that 90% of the fund’s holdings are in Qualified Opportunity Zone Property. And you’d need to ensure that assets held by the fund are substantially improved within 30 months of purchase. If you’re a non-accredited investor who has a small amount of capital gains on which you want to defer taxes, there are other ways to do so.
So, can anyone invest in Opportunity Zones? Certainly, those who have capital gains and want to defer capital gains taxes could be considered legitimate QOF investors. But most QOFs are looking for accredited investors with fairly high minimum investments.
If you are an accredited investor who is considering a Qualified Opportunity Fund investment, be sure to talk with your tax planner or financial advisor before deciding.
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. It should also not be construed as advice meeting the particular investment needs of any investor.
Investors in QOFs will need to hold their investments for certain time periods to receive the full QOZ Program tax benefits. A failure to do so may result in the potential tax benefits to the investor being reduced or eliminated.
If a fund fails to meet any of the qualification requirements to be considered a QOF, the anticipated QOZ Program tax benefits may be reduced or eliminated. Furthermore, a fund may fail to qualify as a QOF for non-tax reasons beyond its control, such as financing issues, zoning issues, disputes with co-investors, etc.
Distributions to investors in a QOF may result in a taxable gain to such investors.
The tax treatment of distributions to holders of interests in a QOF are uncertain, including whether distributions impact the aforementioned QOZ Program tax benefits.
A QOF must make investments in Qualified Opportunity Zones, which carries the inherent risk associated with investing in economically depressed areas.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
