How To Invest In A Qualified Opportunity Fund

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Image of two women working together to review investment in opportunity fund

The Tax Cuts and Jobs Act created another new tax item for American taxpayers – qualified opportunity zones.

Qualified opportunity zones are a way to inspire investment in certain U.S. communities and reward investors for keeping their investments in these communities for long periods of time.

If you want in on this new tax benefit, or want your business to benefit from these investments, here’s what you should know.

 

What are qualified opportunity zones?

Qualified opportunity zones (QOZs) are areas that have been identified as ‘economically-distressed communities’. The zones are meant to inspire economic development and job creation.

Opportunity zones hold this designation for 10 years and are set to expire on Dec. 31, 2027.

Investors who make investments in these zones may receive tax benefits.

 

I’m interested. What do I have to do to invest?

Technically, you invest in a Qualified Opportunity Fund (QOF), not the zone itself. QOFs are investment vehicles organized as corporations or partnerships in opportunity zones.

And, anyone can invest in an opportunity fund. You aren’t required to live, work, or have a business in a QOZ.

To maximize your tax benefit, you must invest a capital gain in an opportunity fund and choose to defer that gain for income tax purposes. Please note, you must make your investment within 180 days from when you’d recognize a capital gain.

You may have trouble finding QOFs to invest in because this provision is so new. There aren’t many QOFs out there, and the IRS is still planning to issue guidance on how to set up QOFs. It’ll take time before funds are available for investment.

 

What’s the tax benefit?

The benefit of investing in a qualified opportunity fund is that you can defer tax on your capital gains. Almost all of your gains will qualify for tax deferral.

If the fund is a partnership, you can defer tax at the partnership or partner level. Similar rules also apply for funds that are corporations.

The capital gains you initially defer will be picked up when you sell your new investment, or on Dec. 31, 2026, whichever occurs first.

If you hold the investment for more than five years, 10% of the deferred gains are excluded from the tax deferral. If you hold this investment for more than seven years, the percentage increases to 15%.

If you hold your investment for at least 10 years, you can adjust the basis of your investment to it’s fair market value on the date you sell or exchange the investment. You have until Dec. 31, 2047, to reach your 10-year holding period and recognize this tax benefit.

 

Where are the opportunity zones in West Michigan?

There are about 10 opportunity zones in the Grand Rapids area. Most of them are located south of where US-131 and I-196 intersect.

In the broader West Michigan area, there are two zones in Holland, one in Hastings, one in Ionia, and two in Muskegon.

If you’d like to view all opportunity zones – in Michigan or nationwide – you can view the map here. Instructions on how to use the map and find opportunity zones are also located here.

 

Investing in a QOF isn’t just a new tax opportunity, it’s also an investment opportunity for you and the community. If you’d like to invest in a qualified opportunity fund, connect with your advisors to help you find funds, understand the pros and cons, and investment requirements.

The goal is to maximize the tax benefits you receive from a QOF. Make sure you have all the information and resources to help make that happen.

 

Have questions about opportunity funds or zones? Let’s talk!