Investing in a Qualified Opportunity Zone (QOZ) program is fairly straightforward. An investor takes their realized gain from an asset sale and invests it in a Qualified Opportunity Fund (“QOF”) to defer taxes on that gain. At the same time, the investor will potentially avoid capital gains on the appreciation of the Qualified Opportunity Zone Property. Another bonus is the QOF will put their funds to work in a low-income community that might be in dire need of resources. In business parlance, this represents a “win-win-win.”
How exactly do these QOFs work? As is the case with other federally sponsored programs, several rules exist when it comes to QOFs. One is that the fund in question is required to invest in a Qualified Opportunity Zone Property (QOZP).
The definition of a QOZ Property can take different forms, as shown in the graphic below. The fund can invest in stock, partnership interest or tangible business property situated within a QOZ. An investor can defer any amount of capital gains from the sale of any investment as long as the requirements listed below are met:
The graphic below shows a breakdown of property in which a Qualified Opportunity Fund might invest:
As soon as the U.S. Treasury Department and Internal Revenue Service issue QOF guidelines, many QOF's will formulate. As such, investors need to keep an eye on certain components to make sure they are in compliance and are investing in legitimate organized funds including the following: