Googling the term “opportunity fund” leads to approximately 194 million results, and the definition of still is not explicitly clear when delving through these results. Adding to the confusion are the websites, such as Enterprise Community Partners (ECP), pointing out that some opportunity funds are based on “a new provision in the Tax Cuts and Jobs Act”, and are “a new class of investment vehicles that aim to responsibly drive much-needed capital in distressed communities throughout the nation.”1 In other words, ECP is talking about the newly passed Qualified Opportunity Fund (QOF) program.
While the terms “Opportunity Funds” and “Qualified Opportunity Funds” might appear to be interchangeable, they are not.
What is an “Opportunity Fund”?
The answer is: It depends. “Opportunity fund” is, but not limited to being, a catch-all for the following:
- A personal savings account. Gary Pinkerton of Paradigm Life describes a real estate opportunity fund as a “growth and tax-efficient, liquid account where you hold your investment capital while evaluating potential deals . . . “2 Such a fund is meant to encourage building up a personal “war chest” for investments, bargains or emergencies. This does not equal a QOF.
- A non-profit organization providing resources to lower-income areas and/or individuals or, as Black's Law Dictionary defines it: a “non-profit fund to help people on low incomes.”3 The idea is that small monetary amounts, combined with financial advice, can help drive change and economic mobility. These are worthy endeavors to which you donate, rather than invest. This is not the same as a QOF.
- Investment entities run by managers. As HDFC Life puts it, such a fund “invests in companies, sectors or investment themes, depending on where the fund manager anticipates growth opportunities.”4 The focus of such investment funds are a potential return on investment, however without the powerful tax deferral/reduction/elimination benefits that QOF’s offer.
What is a “Qualified Opportunity Fund”?
- A QOF is any corporation or partnership with the sole purpose of investing in designated Qualified Opportunity Zones. These zones are typically in low-income or underserved communities, and money invested will go toward the betterment of these areas.
- The investment needs to be the capital gain proceeds from the sale or exchange of an asset in order to qualify for the tax benefits. An investment into a QOF also needs to be done within 180 days of that gain being realized.
- Investing in a QOF means that individuals can defer, and potentially reduce, tax payments on the invested gain that resulted from the original sale of a property or business if it is held in the fund for 5 to 7 years. If held for at least 10 years total, you may avoid capital gains entirely on any appreciation in the Qualified Opportunity Fund as well. For example, if an individual invests a $100,000 capital gain from the sale of a stock portfolio in a QOF, a deferral on capital gains tax until 12/31/26 (or sooner if the QOF investment is sold before that date) is eligible on that original gain. Depending on how long its been held for, that original gain may receive a step-up in basis of 5% (5 years) or 15% (7 years) as well. If the $100,000 is held at least 10 years and it turns out to be worth $500,000 due to appreciation within in the fund, however, no capital gains taxes will be due on that $400,000 growth.5
- QOFs can self-certify, per the IRS.
- QOFs must hold 90% of its assets in a specified Qualified Opportunity Zone.
- QOFs can invest in only three types of Qualified Opportunity Zone Property: Qualified Opportunity Zone Businesses Property; Qualified Opportunity Zone Stocks or Qualified Opportunity Zone Partnership Interests.
Opportunity Funds and Qualified Opportunity Funds are Not the Same Thing
Certainly, Qualified Opportunity Funds do have “opportunity funds” within their makeup. They are geared toward doing good and seek out long-term investment opportunities. However when it comes right down to it, Qualified Opportunity Funds are NOT always interchangeable with anything called an “opportunity fund”. QOFs are specific when it comes to their purpose, mandate and structure.
- Enterprise Community Partners. Opportunity Funds: Tax Reform Created a New Class of Community Investment Vehicles. January 10, 2018.
- Gary Pinkerton. Real Estate Opportunity Funds. Paradigm Life. August 23, 2017.
- Retrieved from https://thelawdictionary.org/opportunity-fund/
- Retrieved from https://www.hdfclife.com/insurance-knowledge-centre/about-life-insurance/what-is-opportunities-fund
- This is a hypothetical example, based on the current IRS guidance (as of March 2019) and is not representative of an experience of any particular investor. There is no guarantee that an opportunity fund investment will appreciate in value and result in a gain. Investors may lose their invested principal.
What is a Qualified Opportunity Zone?
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