Innovative Investment Incentive: Qualified Opportunity Funds
A new tax-saving vehicle called Qualified Opportunity Funds was created by the Tax Cut & Jobs Act to spur investment in distressed communities. The objective is to leverage some of the $6.1 trillion of unrealized gains in the marketplace today by allowing a deferral of gain recognition to allow funds to be put to work in the targeted communities. There are 33 opportunity funds identified in the great Baton Rouge Area, 44 in the New Orleans area, and a total of 150 in the state of Louisiana that provide opportunity for investment. To see the complete list of Qualified Opportunity Zones approved, visit the CDFI fund website.
While Faulk & Winkler cannot vouch for the quality of any third-party fund’s investment strategy, we can help break down the generalities of the funds and the potential tax benefits.
The opportunity zone program offers three tax benefits for investing if certain criteria are met
1. Temporary deferral of gain recognition for funds reinvested 1
2. Step up in basis for original gain reinvested 2
3. Permanent exclusion of gain on the appreciation of the assets invested in 3
What are Qualified Opportunity funds (“O Funds”)
Corporations or partnerships formed after 12/31/17 that invest in qualified opportunity zone property and continually hold at least 90% of their assets in such property. Qualified opportunity zone property is an investment in a corporation’s stock or partnerships interest that is a qualified opportunity zone business 4(“O zone business”), or an investment in qualified opportunity zone business property5 (“O zone business property”).
You do not necessarily need to invest in someone else’s fund; you can create your own entity for this purpose, but it will need to act as a separate entity and file its own tax return. To certify the fund, the entity will self-certify with its first tax return.
Real Estate Development Considerations
These funds are eligible to get new market or historic credits on top of the gain deferral opportunity which can sweeten the deal in many cases. These funds may offer a great way to structure a business transaction that you were going to do regardless, but there are requirements and considerations to review to ensure the project will qualify.
O Funds are an opportunity for investors to help promote growth in distressed communities while also receiving tax savings.
Circumstances vary greatly between taxpayers and the above is not intended to be tax advice. If you have any questions about your situation, please contact one of our tax professionals at (225) 927-6811.
1 You must reinvest the gain funds into the opportunity fund within 180 days. The gain is recognized at the earlier of the date the fund is disposed or December 31, 2026. If the investment decreases you will only be subject to tax on the lesser of the original gain or the fair market value at time of sale.
2 If you hold the investment in the fund for at least 5 years you get a 10% basis increase and if hold at least 7 years you get an additional 5% step up. This allows you to exclude 15% of the original gain from tax.
3 This applies only to the gains on top of original investment
4 To be an O zone business it must have majority of assets that are O zone business property, derive at least 50% of income from active business, and have less than 5% of assets invested in nonqualified financial property.
5 O zone business property is tangible property used in a trade or business that is acquired after December 31, 2017, original use commences with the O zone business, or the O zone business substantially improves the property (invests at least as much as original investment), and majority of use is in the O zone.