Since its introduction as part of the Tax Cuts and Jobs act of 2017, the Opportunity Zone Program has generated a great deal of press (some good, some bad). It’s also generated interest among investors, especially those interested in economic revitalization.
But Qualified Opportunity Zones (QOZs) represent a different kind of investment prospect than, say putting money into direct real estate or a Delaware Statutory Trust. Specifically, you don’t find a designated Opportunity Zone and finance it on your own.
There are two things required for the financing of, and investing in, a QOZ:
What follows is a more specific explanation of each of these aspects.
The Opportunity Zones concept was the brainchild of the Economic Innovation Group, among others. The theory was that private capital (in the form of capital gains from the sale of capital assets) could be used to help support economic revitalization in communities that were struggling financially.
As such, the rules are pretty specific. Namely that the only type of funds allowed for a Qualified Opportunity Zone are the gains realized from the sale of a capital asset. This program isn’t geared for extra money that’s lying around. It’s focused specifically on using capital gains as the investment. Additionally, you must invest those gains within 180 days of realizing them.
In response, you, the investor, can benefit from some useful tax advantages.
The other aspect of QOZ financing is that you can’t go find a federally designated Opportunity Zone and directly hand over your money to a QOZ business or developer. Rather, you need to invest those capital gains into a Qualified Opportunity Fund (QOF). A QOF is defined as an entity (corporation or partnership) that has as its sole purpose investment in QOZs. As mentioned above, investing your capital gains into a QOF can provide some positive tax benefits.
You could also form your own QOF. To do so, you would need to organize as a corporation, LLC, or partnership for the sole purpose of investing in a QOF. You would also need to hold 90% of the assets in a QOZ. The IRS has other filing and information requirements involved with setting up and maintaining your own QOF.
Investing in a Qualified Opportunity Zone falls under the category of “doing well to do good.” Tax advantages can also make this type of investment appealing. But there are also many rules and regulations surrounding QOZ investments and financing. As such, you shouldn’t undertake such a move without advice from your tax professional.