Opportunity Zones and Opportunity Funds

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Opportunity Zones and Opportunity Funds

Opportunity Zones are areas certified by the Department of Treasury with the goal of encouraging investment in low-income areas by providing special tax advantages to investors. There are Opportunity Zones located in all 50 states. Investments made in Opportunity Zones via Qualified Opportunity Funds that are held for 10 years can be sold on a tax-free in certain cases. In addition, taxes on capital gains that are realized today can be deferred through 2026 in certain cases if these gains are used to invest in Qualified Opportunity Funds within 180 days of realization. IRS rules have stringent requirements that must be followed in order to benefit from the advantages of Opportunity Zone Investing.

What is a Qualified Opportunity Fund?

In order to benefit from the tax advantages of investing in Opportunity Zones, the IRS has stipulated that investments must be made through Qualified Opportunity Funds. These funds can either be organized as partnerships or corporations, and pre-existing entities can elect to be Qualified Opportunity Funds. Qualified Opportunity Funds can invest in both real estate and certain types of operating businesses subject to a complex set of rules.

The Importance of Qualified Opportunity Fund Compliance

The IRS allows partnerships and corporations to make an election to be treated as a Qualified Opportunity Fund, which goes into effect as of a month chosen by the entity. These entities must then self-certify that they meet the requirements to be considered a Qualified Opportunity Fund treatment by filing IRS form 8996 with their originally filed federal income tax return on an annual basis. The criteria that is required to meet in order to obtain Qualified Opportunity Fund treatment is extremely complex, making it essential to consult with a tax professional throughout the process and not merely when it is time to file taxes.