A Qualified Opportunity Zone Fund is an investment vehicle that was created by the Tax Cuts and Jobs Act of 2017 to encourage investment in low-income communities. These funds provide a way for investors to take advantage of significant tax benefits while investing in businesses and real estate projects located in designated Opportunity Zones.
What is a QOZ Fund?
To qualify as a QOZ Fund, an investment vehicle must be organized as a corporation or partnership for the purpose of investing in QOZ property. QOZ property includes any business or real estate project located in an Opportunity Zone. In order to maintain its status as a QOZ Fund, a fund must invest at least 90% of its assets in in QOZ property.
The QOZ program provides several tax benefits to investors who invest in QOZ Funds. One of the main benefits is the deferral of capital gains taxes. If an investor sells an asset that results in a capital gain, they can reinvest the gain into a QOZ Fund within 180 days of the sale and defer paying taxes.
In addition to the deferral of capital gains taxes, the QOZ program provides a step-up in basis for investments held for at least five years. If an investor holds their QOZ Fund investment for at least five years, they can increase the basis of the investment by 10%. If an investor holds a QOZ fund for at least seven years, they can increase the tax basis by an additional 5%.
Perhaps the most significant tax benefit of the QOZ program is the ability to exclude capital gains taxes on investments held for at least 10 years. If an investor holds their QOZ Fund investment for at least 10 years, they can exclude from taxable income any capital gains that the investment generates.
The QOZ program has generated significant interest from investors and fund managers since its inception. According to the National Council of State Housing Agencies, there were over 10,000 QOZ Funds as of September 2021, with over $75 billion in capital raised.
QOZ Fund Structure and Risks
Fund sponsors can structure QOZ funds in a variety of ways including as private equity funds, real estate funds, and venture capital funds. The types of investments that QOZ Funds can make are also quite broad, including real estate development, renewable energy projects, and operating businesses.
While the QOZ program provides significant tax benefits to investors, they also present important risks. One of the main risks is that many QOZ funds invest in economically distressed areas. These areas may have higher levels of crime, lower quality infrastructure, and fewer amenities than other areas, which can make it more difficult to attract tenants or customers.
Another risk associated with investing in QOZ Funds is the fact that many of the investments made by these funds are in early-stage companies or projects. These investments may be riskier than investments in more established companies or projects, and may have a higher probability of failure.
In addition to these risks, investors should also be aware of the liquidity risk associated with investing in QOZ Funds. Many QOZ Funds have long investment horizons, and investors may be unable to sell their investments for a significant period of time. This can make it difficult for investors to access their capital if they need it for other purposes.
Qualified Opportunity Zone (QOZ) funds were created as part of the Tax Cuts and Jobs Act of 2017 to encourage investments in economically distressed areas called “opportunity zones.” These funds allow investors to defer and potentially reduce their capital gains tax liability by investing in eligible properties and businesses located in these designated zones.
QOZ Fund Investments
Types of investments that can be in a qualified opportunity zone fund include:
- Real Estate: QOZ funds can invest in real estate located in opportunity zones, such as multifamily housing, commercial buildings, and mixed-use developments.
- Operating businesses: QOZ funds can invest in operating businesses located in opportunity zones, including startups, small businesses, and manufacturing facilities.
- Infrastructure: QOZ funds can invest in infrastructure projects located in opportunity zones, such as roads, bridges, and airports.
- Renewable Energy: QOZ funds can invest in renewable energy projects located in opportunity zones, including solar, wind, and geothermal energy projects.
It’s worth noting that to be eligible for investment by a QOZ fund, the property or business must be located in an U.S. Treasury Department designated opportunity zone. Additionally, there are certain requirements the QOZ fund itself must meet in order to qualify for the tax benefits associated with this type of investment.
Other Resources
IRS Guide to Qualified Opportunity Zones
Three Things to Look for in a QOZ Fund