Quality Opportunity Fund: What It Is, How It Works

What Is an Opportunity Fund?

An opportunity fund is an investment vehicle designed to invest in real estate or business development in areas known as “opportunity zones.”

Opportunity zones are particular geographic areas that have been designated as economically distressed. As a result, these areas may be subject to different economic regulations than other regions in the country or state. Tax incentives for investments in opportunity zones include delayed and potentially reduced taxes on capital gains.

Understanding Opportunity Funds

Opportunity funds were established as part of the 2017 Tax Cuts and Jobs Act (TCJA) to encourage investment in underfunded, low-income, and distressed communities. For a community to be classified as an opportunity zone, it must be designated by the state and subsequently certified by the secretary of the U.S. Treasury, via the Internal Revenue Service (IRS).

An investment fund created by a corporation or partnership can become designated as a qualified opportunity fund by filing IRS Form 8996 with their federal income tax return. Once designated, the fund must invest at least 90% of its assets in designated opportunity zones to receive preferential tax treatment.

Investing in Opportunity Zone Properties

Opportunity funds must make “substantial improvements” to the properties in which they invest. The TCJA defines substantial improvements as investments in the property that are equal to the original value paid by the fund. These must be made within 30 months. For example, if a property is purchased for $700,000, then the opportunity fund has a 30-month window to make at least $700,000 worth of improvements.

Certain types of businesses cannot be included in opportunity funds, even if they reside within opportunity zones. They include:

• Golf courses
• Country clubs
• Massage parlors
• Hot tub facilities
• Suntan facilities
• Racetracks or other facilities used for gambling
• Liquor stores

Tax Advantages of Qualified Opportunity Funds

Beyond the ability to defer taxation of previous gains, the longer a participant holds their qualified opportunity fund investment, the smaller their tax burden may be:

• If held for longer than five years, then investors receive a 10% exclusion of the deferred gain on their investment. 
• If an investor holds for more than seven years, then they receive a 15% exclusion. 
• After 10 years, the investor does not owe federal income taxes on the fund’s appreciation by the date of sale.

Given that opportunity funds are relatively new on the scene, and that the Trump administration that facilitated them is no longer in office, specific rules and regulations for investment in, and taxation of, qualified opportunity funds could be subject to change. Investors interested in participating should consult investment and tax professionals.

Where to Find Qualified Opportunity Zones

Opportunity zones currently exist in all 50 U.S. states, as well as Washington, D.C., and five U.S. territories. To view all qualified opportunity zones, search the list below, or visit the U.S. Department of the Treasury for the most up-to-date listings.

Zones are identified by state, county, and census tract numbers. To determine the census tract number for a specific address, visit the U.S. Census Bureau’s Geocoder. Enter the address you’d like to find, and select “Public_AR_Current” from the drop-down menu of available datasets to search.

The Gulf Opportunity Zone, for example, was established for the area that was largely impacted by the storms surrounding Hurricane Katrina in 2005, including parts of Alabama, Louisiana, and Mississippi.