What to consider when creating a Qualified Opportunity Fund

OZ Magazine, Volume 1, Issue 1

Article By OZ Investors Magazine Staff

By Opportunity Zone Expo Staff 


Opportunity beacons for investors looking to financially back distressed and low-income U.S. communities. The federal government is incentivizing such ventures through its Tax Cuts and Jobs Acts of 2017, which offers financial perks to those who support “qualified opportunity zone” (QOZ) regions. 

The IRS recently proposed regulations to help clarify the rules, but those looking to invest in a qualified opportunity fund (QOF) should first turn to experts for help, says RealCrowd chief executive Adam Hooper. 

“Technically, all one has to do is self-certify that the fund will be operating in a manner consistent with the (QOZ and QOF) regulations as proposed by the Treasury,” he says.  

An eligible corporation or partnership can self-certify by filing an IRS Form 8896 along with its federal income tax return. The IRS notes that the documents must be returned promptly, while taking extensions into account. 

In practice, there are many nuances that need to be considered and it will definitely be essential to partner with a competent tax advisor who understands the full breadth of the regulations to make sure that the fund is in compliance.”  

There are several requirements a QOF needs to meet to in compliance and avoid any penalties, Hooper saysFor instance, investments must be made into business property located within state-designated opportunity zones. As well, 90 percent of a fund’s assets must be invested in a QOF property. 

He says investors should take several factors into account when deciding whether a QOF is right for them. 

“Making sure that the QOF is set up and structured correctly from the start is going to be very important, along with ensuring ongoing compliance with the regulations,” says Hooper 

Tax benefits are divided into three parts.  

“The deferral of payment for the capital gains tax that would otherwise be due from the recognition of that gain until the end of 2026, or when the investors stake in the QOF is sold,” Hooper says. Second is a step up of the basis for that investment of gain of 10 percent if the QOF investment is held for five years, and an additional five percent step up in basis if that investment is held for an additional two years. Note that to get the full benefit of that 15 percent step up in basis the investor has to contribute that gain to a QOF by the end of 2019.  

The final benefit is an exemption on capital gains tax for all appreciation of value from the QOF if the investor holds their investment for at least 10 years.  

Before creating a QOF, investors should also consider the type of property they wish to invest in, says Kosmont Companies chief executive Larry Kosmont.  A QOF must invest 90 percent of its assets in QOZ property through opportunity zone stock, partnership interest, or business property. 

“They need to identify their preferred project type,” says Kosmont, who founded his real estate, financial advisory and economic development services firm in 1986. “They will also need to match that with properties available for sale in approved opportunity zones.” 

Before making a move, investors should mull an opportunity fund’s ability to meet compliance requirements and the desired geography. 

“As with any investment, the fund needs to define its goals and priorities,” Kosmont says. “The caution here is that there are tests associated with capital held by the fund. A fund should not accept capital from investors until they have a plan for investing that capital.” 

Investors considering to form an OZ fund should also consider whether they can deploy resources quickly, adds USC Sol Price School of Public Policy professor Gary Dean Painter. 

“The timelines almost require that investment targets have already been identified,” he says.  

Investors have until December 31, 2026 to take advantage of the programas long as they can generate the capital gains necessary to invest.

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OZ Investors Magazine Staff
OZ Investors Magazine Staff

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