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Opportunity Zone Funds

History

What Are Qualified Opportunity Zone Funds?


Origin and Purpose

Created by the Tax Cuts and Jobs Act of 2017, Qualified Opportunity Zones (“QOZs”) are land tracts in communities designated by the U.S. Treasury Department and Internal Revenue Service to be economically depressed or underserved. To incentivize private investment in these communities, the QOZ legislation created tax breaks to investors who make qualified long-term investments that have the potential to promote economic growth in these zones. QOZ Fund sponsors that we work with will only acquire property that underwrites favorably notwithstanding the tax benefits. Also, we need to take the stated legislative intent with a grain of salt, because there are many designated ‘zones’ that are quite robust.

Tax Benefits

By investing in QOZs, investors can 1) defer the payment of capital gains tax on their relinquished property for several years and 2) completely avoid capital gains tax on the appreciation of the QOZ investment itself.

Applies to All Capital Gains

QOZ Fund investments are available to all investors who have sold capital assets for capital gains. It’s not limited to real estate. So, for example, gains from the sale of a business or a stock portfolio are also eligible for favorable tax treatment.

QOZF Vs 1031 Exchange

QOZF embraces all capital gains, while 1031 is limited to real estate capital gains.

QOZF offers limited tax deferral on relinquished properties, while a 1031 tax regime can potentially defer capital gains on real estate indefinitely through sequential tax deferred exchanges.

QOZF requires reinvestment only of the gain portion of a sale, while 1031 requires reinvestment of all proceeds including replacement of any debt relief.

QOZF requires reinvestment into the Fund within 180 days of the sale of the asset. 1031 requires identification of potential replacement properties within 45 days.

Benefits

Main Reasons We Use Opportunity Zone Funds

  • Broken 1031 exchange. Sometimes an exchange fails because of constructive receipt or failure to identify replacement properties within the IRS time frame. Since QOZF’s aren’t subject to these rules, they are available to the investor so long as an investment into the Fund is made within 180 days after a sale.
  • Liquidity Preference. Only the capital gains portion of sale proceeds need to be invested into a QOZF. For an exchanger with liquidity concerns, the QOZF offers a less capital intensive alternative.
  • Growth Catalyst. QOZF investments are generally developmental in nature. Accordingly, these investments project higher growth multiples than 1031 vehicles which focus on more stabilized investments generating steady income with capital protection.
  • Exchangers seeking more growth might consider blended solutions combining a DST portfolio with a QOZF investment. We discuss this option in detail with all our exchange clients.