FAQ: Introduction to Qualified Opportunity Funds

Thursday, November 8th, 2018 and is filed under AI Insight News

Qualified Opportunity Zone investments are quickly gaining interest as new offerings are becoming available. Read the introductory FAQ below to learn more.

What are Qualified Opportunity Zones?

An Opportunity Zone is a community nominated by the state and certified by the Secretary of the U.S. Treasury. These are typically located in areas under economic distress or in low income communities. Opportunity Zones were added to the tax code by the Tax Cuts and Jobs Act in December 2017, with the purpose of encouraging economic development and job creation in these distressed areas.

What are Qualified Opportunity Funds?

A Qualified Opportunity Fund (QOF) is a new investment vehicle that is set up as either a partnership or corporation and may be eligible for preferential tax treatment. The Fund invests in eligible property located in a Qualified Opportunity Zone using the investor’s gains from a previous investment to fund the QOF.

What is considered a Qualified Opportunity Zone?

Many commercial, industrial and residential areas in the U.S. are considered eligible property for designation. According to CNBC.com:

  • More than 8,700 properties across the country have already been certified as opportunity zones.
  • About 90 percent of Opportunity Funds’ capital must be invested in projects located in deemed opportunity zones.
  • Eligible projects include investing in new development, a property upgrades or funding a start-up business.

What are the potential benefits?

The new tax law outlines two major incentives: 1) The temporary deferral of inclusion in gross income for capital gains reinvested in a QOF, and 2) the permanent exclusion of capital gains must apply  only to the appreciation in the investment in the QOF.

Specific tax exclusion benefits include:

  • All gains invested in the QOF may be deferred in the year the temporary deferral election is made.
  • Investments held in the QOF:
    • For at least five years, will receive a basis increase equal to 10%;
    • For at least seven years, will receive an additional basis increase of 5%, for a total increase of 15%;
    • For at least 10 years, will receive permanent exclusion from taxable income of capital gains from the sale or exchange of an investment. This exclusion applies to the gains accrued from an investment in a QOF and not the original gains invested.

Where can I learn more?

Visit the FAQs put together by the IRS, read this article recently published by Sound West’s President Greg Genovese, as well as this article by the Economic Innovation Group, which discusses how the zones were created and includes a nationwide map.

AI Insight is currently working with fund sponsors who are considering offering Opportunity Zone Funds and we have begun launching these offerings on our platform, along with the hundreds of open and closed alternative investments we currently offer to help with your regulatory-compliance needs.

AI Insight also includes Opportunity Zone investments as a new category in our private placement industry reporting provided monthly. You can also take an Opportunity Zone CE course for generic education as part of our extensive e-learning library. We are also available as a platform for customized training and unbiased product-level research.

If you do not currently subscribe to AI Insight and would like to learn more, contact us to request a live tour.


Information sources: Treasury.gov and IRS.gov