What is an opportunity fund?

Opportunity funds are pools of money that are designed to be invested in businesses and real estate that exist in opportunity zones as defined by the IRS. These opportunity zones were created as part of the 2017 Tax Cuts and Jobs Act to encourage investment in low income and economically distressed areas. This was thought of as a way to improve these distressed areas with private funds instead of taxpayer dollars. It is through deferred and reduced taxes on capital gains that this incentive to invest is encouraged.

A Qualified Opportunity Fund can be created by a corporation or partnership by filling out paperwork (Form 8996) with the IRS. Once a fund is ‘qualified’ it must invest at least 90% of its funds in these designated opportunity zones in order to receive the tax advantages.

Why Were Opportunity Funds created?

Capital gains taxes are only paid to the US government when an asset is actually sold. It is estimated that there is $6.1 Trillion dollars held by US households and corporations in unrealized gains. These opportunity funds were created in part to entice the realization of these gains and re-invest in economically distressed areas that badly need new investment.

Another key feature is that opportunity funds must make “substantial improvements” to the real estate that they purchase in these designated opportunity zones. Note that the fund has 30 months to complete the improvements. The IRS defines “substantial” as being equal to the value of original purchase price of the property. For example, if the opportunity fund were to purchase a vacant apartment complex for $1 million dollars, they would then have just 30 months to complete (not merely start, but actually complete) another $1,000,000.00 in improvements to the complex.

Certain types of businesses are not allowed as part of the opportunity fund qualified investments. Many of these can be referred to as “sin” businesses:

• Massage parlors,
• Hot tub facilities,
• Sun tan facilities,
• Liquor stores,
• Racetracks,
• Casinos,
• Even Golf and Country clubs.

Why would you invest in an Opportunity Fund?

When you sell taxable assets – stock, bonds, mutual funds, real estate – you have to pay capital gains tax. However, if you take the proceeds of the sale and re-invest in an opportunity fund (within 180 days from the date of the sale) you can defer and possibly even eliminate having to pay the capital gains tax. There is no cap on how much you can invest in an opportunity fund.

If you hold those assets within in the opportunity fund for 5 years you can reduce your tax paid by 10%. If you hold for 7 years you can reduce your taxes by a further 5%. Best of all, if you hold your opportunity fund assets for 10 years you no longer have to pay the capital gains taxes on any profits generated within the fund at all.

It is important to note that you can defer paying those capital gains taxes until you sell your opportunity fund investments or until December 31^st 2026, whichever comes first. The clock is ticking to take advantage.

You can find IRS designated opportunity zones in every nook and cranny of the USA. All 50 states, DC and 5 territories, including all of Puerto Rico. Visit the US Dept. of the Treasury for a complete listing.

Conclusion:

Opportunity funds have a real prospect of making a large impact in low income and distressed areas that are so badly in need of investment and refurbishment. These funds deal in financial capital but there is potential to improve the human capital in these distressed areas as well. The fund provides the opportunity for an entrepreneur to finance his or her new business and for that same entrepreneur to gain valuable experience, network connections and knowledge that just might stay in the area and start another new business.