The Opportunity Zone Program was included in the Tax Cuts and Jobs Act of 2017 to redirect capital to lower-income neighborhoods.
Specifically, the program encourages investors to funnel the capital gains from the sale of capital assets into Qualified Opportunity Funds (QOFs). Those QOFs then pool the investments and direct them toward Qualified Opportunity Zone Properties (QOZP) in federally designated Qualified Opportunity Zones (QOZs).
But what kind of capital gains can be invested in a QOF? The answer is any type of capital gain, as long as that gain is triggered from the sale of capital assets.
When it comes to capital gains, timing can be important. Specifically:
Both short-term and long-term capital gains can be invested in Qualified Opportunity Funds.
Capital gains are generated from the sale of capital assets. A capital asset is defined as any property owned for personal or investment purposes. This can include real estate (both primary residential or commercial used for trade or investment). Other types of capital assets include the following:
Even wine is considered a capital asset unless it is used in conjunction with a trade or business. If this is the case, then that wine would be classified as inventory, and its sale wouldn’t trigger a capital gain.
Finally, it’s important to remember that most QOFs are open only to accredited investors. These investors are high net-worth, with income exceeding $200,000 and an overall net worth of $1 million. Anyone below these thresholds is considered a non-accredited investor.
Theoretically, a non-accredited investor isn’t really disallowed from a QOF investment. Nor is that individual prevented from forming their own Qualified Opportunity Fund. But given the structure of most QOFs (and the challenges involved with forming one), these investments would better fit the profile of an accredited investor.
Additionally, before taking capital gains and putting them into a QOF, it’s important to perform due diligence on the fund, its sponsor, and the QOZP. It’s also a good idea to talk with a tax professional and financial planner. Just because any capital gain can be invested in a QOF, this doesn’t mean it would be an effective strategy.