Opportunity Funds promote investment in the development of low-income communities across the US, by offering investors federal tax advantages that are only available through the new
Opportunity Zone program.
What are the O-Zone…
When you reinvest realized capital gains into an Opportunity Fund, you stand to benefit from steadily improving tax incentives the longer you hold the investment.
What is a…
An Opportunity Fund is an investment vehicle that intends to nvest at least 90% of its holdings into partnership interests, businesses, or property (real estate, factory equipment, etc.) within a qualified Opportunity Zone.
West Virginia has roughly 55 designated Opportunity Zone eligible census tracts, two of which are located in Upshur County that occupy 10 square miles.
Defer Paying Taxes on
By moving realized capital gains into a qualified Opportunity Fund within 180 days of the asset sale, investors can defer paying capital gains taxes on that gain until December 31, 2026 or until they sell their Opportunity Fund investment – whichever is earlier. Deferring their tax liability allows investors to put a greater amount of capital to work for a longer period of time. Funds that otherwise would have been used to pay taxes upfront can instead be invested and earn returns for several additional years. In other words, the ability to defer capital gains tax gives Opportunity Fund investors a major advantage in the earning power of their dollars.
Capital Gains Tax Liability Reduced
by up to 15%
If an investor holds their Opportunity Fund investment for at least 5 years prior to December 31, 2026, they can reduce their deferred capital gains tax liability by 10% through a step-up in basis. If that investor holds their Opportunity Fund investment for 2 additional years they can reduce their deferred capital gains liability by another 5%. That means by holding an Opportunity Fund investment for 7 years prior to December 31, 2026, an investor can reduce their tax liability on the deferred capital gains invested in the Opportunity Fund by 15%.
Pay Zero in Capital Gains Taxes
If an investor holds their Opportunity Fund investment for another 3 years (10 years total), they can expect to pay zero dollars in capital gains taxes on any appreciation from their original Opportunity Fund investment. That’s because Opportunity Fund gains earned from Opportunity Zone investments can qualify for permanent exclusion from the capital gains tax if the investment is held for at least 10 years.
A QOF is an Investment Vehicle
A QOF is an investment vehicle created for investing in eligible property located within an O-Zone and provides a tax benefit to investors who invest realized capital gains from other investments into the fund. The fund can buy the stock of any business, whether newly formed or expanding, not classified as a "sin" business, such as tanning salons, liquor stores, adult entertainment, casinos, racetracks, etc. It can buy a partnership interest that holds businesses within the zone and it can own tangible property directly.
If a QOF Buys Real Estate
If a QOF buys real estate, it must substantially improve that property for it to be considered an eligible investment. For example, buying an existing home and converting it to a multifamily rental would qualify, but substantial improvement requires an investment over 30 months that exceeds the adjusted basis. This is a much higher standard than in other programs.
The Businesses Must Generate at Least 50%
The businesses must generate at least 50% of their gross income from activity conducted in the zone. The QOF can only invest in the equity of businesses, and 90% of the fund's assets must be invested within an O-Zone, although investments can be made in multiple zones. A qualified fund is described as a corporation or partnership, and it is unclear whether the limited liability corporation may be used.
Any Taxpayer Can Create a QOF
Any taxpayer can create a QOF by self-certifying on a form (which has yet to be created by the Treasury Department) and attaching it to the tax return. The investor does not need to live or work in the O-Zone to receive the tax benefits of investing in the fund. More details about existing regulations, as well as information about questions yet to be resolved, can be found at the Economic Innovation Group's website. The bipartisan public policy organization, headed by Sean Parker, the first president of Facebook and founder of Napster, was the driving force behind the O-Zone program, which was incorporated into the Tax Cuts and Jobs Act under the leadership of Sen. Tim Scott of South Carolina, who proposed it as an amendment.
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