If you ever thought about investing and being a part of projects to revitalize run-down areas in your community, opportunity funds may be the vehicle for you. Investing through opportunity funds may not for everyone, but for the right investor, it could provide you with a financial boost and tax break. This article will further explore the details behind opportunity funds and why companies like Primior are at the forefront of helping investors take advantage of this investment vehicle.
What is a Qualified Opportunity Fund?
According to the IRS, a Qualified Opportunity Fund is an investment vehicle formed to invest in eligible property that is located in a Qualified Opportunity Zone. These zones are economically-distressed communities where new investments, under certain conditions, are eligible for favorable tax treatment. Areas that qualify as Opportunity Zones if the state designates them through a nomination process, which must be certified by the Secretary of the U.S. Treasury via his delegation of authority to the Internal Revenue Service. You can view a map for Qualified Opportunity Zone tracts here.
The Opportunity Zone program originates from a new provision in the Tax Cuts and Jobs Act, and was created to stimulate private investment in low-income and stricken communities in exchange for capital gain tax incentives. Opportunity funds operate simply as a corporation or partnership for federal tax purposes, and are meant to benefit two groups that are usually not well-connected: low-income communities and individuals with large investment holdings.
How To Use Opportunity Funds To Minimize Capital Gains
The Opportunity zone program aims to stimulate the investment of an estimated $6.1 trillion of unrealized private gains. Investors with existing assets that have generated profits and reinvesting those profits into these new funds are eligible for a sizable tax break. Unlike existing programs made for private investment to low-income areas through tax advantages, the Opportunity Zone program is cheaper, more flexible, and independent upon government agencies to function, as Opportunity Zones don’t operate through a tax credit program. This removes any limitation on the number of Opportunity Funds that can exist, allowing the entirely new IRS rule to promote profitable changes in the tax treatment of capital gains.
So how can investors obtain the tax benefits of these funds? Here’s a breakdown of how these tax incentives can boost after-tax returns for Opportunity Fund investors.
- After selling an appreciated asset (stocks, bonds, real estate or a business), an investor has 180 days to put that money they gained from the sale into an opportunity fund.
- Investors can defer tax on any prior gains invested in an opportunity fund until either: the earlier of the date on which the investment in a QOF is sold or exchanged, or December 31, 2026.
- If the fund investment is held more than 5 years, there is a 10% exclusion of the deferred gain.
- If held for more than 7 years, the 10% becomes 15%.
- If held for at least ten years, the investor is eligible to pay no capital gains taxes on any appreciation in their Opportunity Fund investment
- 90% of the money from these funds’ must be invested in projects located in an opportunity zone.
In light of the potential of profit, just because you could get a significant tax break from an opportunity zone fund does not mean that it is a good investment. Since these funds pop up rather quickly, there are risks in overpaying fees to people that charge for setting these up. You may do all your research and the project may still not make money. Opportunity funds may still be very new, but slowly and surely they’re gaining investors.
Investing in an opportunity fund is a worthwhile chance to make a financial decision that impacts your community. By investing in a fund and focusing on low-quality areas, you contribute to its value to build equity. It takes a proven partner like Primior that knows how to skillfully navigate the complex market to deliver real value that appreciates over time. We make informed decisions every step of the way and accommodate investors of all levels.