What is a Qualified Opportunity Zone Fund? Here’s the short version, it’s a new break that allows you to re-invest gains from any assets (real estate, stock, etc.) into qualifying go-zone funds. You get both tax deferral and some tax reduction as a result of the re-investment plus some tax-free income off the new investment. It’s a significant deal if you have an appreciated asset or gain and you’re looking to re-invest.
We have previously written about what the zones are, where to find them, and the benefits of making the investment, but this article is what will help you get into an Opportunity Zone, or maybe even set up the fund to invest in one. Whether you are investing your own funds that would otherwise be subject to capital gains or whether you raise funds from others, the tax benefits are significant, and learning what property qualifies and what the requirements are for a qualifying fund is critical.
What is a Qualified Opportunity Zone Fund?
To get the deferrals and tax avoidance we have spoken of, you must invest in a qualified opportunity zone fund. It must be a corporation or a partnership, and it must have 90% of its assets invested in opportunity zone property. The property can be stock of a corporation, a partnership interest, or ownership in any opportunity zone business. BUT, it must be in an opportunity zone (see link to map above)!
A taxpayer need only reinvest gains, not the entire proceeds from a sale of assets. Other provisions in the tax code that defer gains usually require reinvestment of all proceeds (e.g., like-kind exchanges, involuntary conversions, etc.).
We have spoken with a lot of people looking to make investments in some form of assisted living. This can be a great opportunity! For example: You are looking to purchase a large home with several bedrooms to convert into an assisted living facility and you use the link above and find that at least one of the properties you are considering for conversion is in an opportunity zone for your state. Great News! If not, you should redraw the boundaries for your listing to see if you can find a property in the Zone! Once you have identified a property in the Zone, you will need to establish a partnership or a corporation (we can help you set it up properly). You will invest your funds (which are subject to capital gains) into the new entity, thus creating a fund and then purchase the assisted living center. Now use the remaining money to rehab, furnish and staff it! You are now in the Zone of tax deferral and on the path to outright tax avoidance on the gains in the assisted living center.
A few things you must know:
- The fund must be invested in a new business in the Opportunity zone after December 31, 2017
- The 90% investment in the Zone is tested at two points. First, six months after the fund is established, and second on the last day of the taxable year of the fund. If at those two points, 90% of the funds aren’t invested in the Zone you and your partners will be subject to a penalty!
- The IRS is currently developing a form in which the fund manager (entity manager) will self- certify the investment as an opportunity zone fund. The form will be out soon.
- There are a few businesses the fund cannot own or that do not qualify as Zone business: “private or commercial golf course (sorry Mar a Lago), country club, massage parlor, hot tub facility, suntan facility, racetrack or other facility used for gambling, or any store the principal business of which is the sale of alcoholic beverages for consumption off premises.”
- The business must also generate 50% of its income from the trade or business – You can’t have an assisted living center in which the residents are helping to mine crypto, and the crypto is producing more that 50% of the income for the fund.
Remember, it is all in the setup! You don’t want to get too far into the zone without getting confirmation you are on track! Give us a call and set up a consultation and we will help make sure you get in and stay in the Zone!