Thinking About Investing in a Qualified Opportunity Zone Fund?

Here’s What You Need to Know First
By Philip Bellissimo On March 8, 2023
Phil is a CPA & Manager at BSB.

Are you an investor or business owner with significant capital gains who is looking to defer the taxes on those gains and potentially generate higher after-tax returns on your investments? If so, investing in an opportunity zone fund might be an attractive option for you to consider. Here are some basics that you need to know about investing in opportunity zone funds and the tax benefits that they offer.

Opportunity zone funds are investment vehicles that were created by the Tax Cuts and Jobs Act of 2017 to encourage investment in economically distressed areas of the United States. These funds offer tax incentives to investors who invest in designated opportunity zones, which are low-income census tracts that have been identified by state governors and certified by the U.S. Treasury Department, many of which are located in the New York metro area.

What is an Opportunity Zone Fund?

An Opportunity Zone Fund is a private investment vehicle that is organized as a partnership or corporation and is designed to invest in qualified opportunity zone property. These funds are typically managed by professional investment firms or real estate developers who have experience in identifying and investing in real estate and other businesses located in opportunity zones.

What Are the Tax Benefits of Investing in an Opportunity Zone Fund?

One of the primary benefits of investing in an opportunity zone fund is the potential to defer capital gains taxes. When you sell a capital asset that has appreciated in value, you are required to pay capital gains taxes on the profit. However, by investing those capital gains in an opportunity zone fund within 180 days of the sale, you can defer the payment of the capital gains taxes until the new investment is sold or until December 31, 2026, whichever comes first.

Additionally, investors who hold their opportunity zone fund investments for at least 10 years can completely eliminate capital gains taxes on any appreciation in the value of the opportunity zone investment. This means that if the investment doubles in value over the course of 10 years, the investor can sell the investment without paying any capital gains taxes on the appreciation, as long as the investment is sold before 2048. This is the greatest advantage of investing in an Opportunity Zone Fund, so investors looking to maximize tax benefits should understand that this is a long-term, illiquid investment when making the decision to invest. Transfers of interests, even to family members, during the hold period may result in an “inclusion” event, thereby negating some or all of the benefits of investing in an Opportunity Zone Fund.

Note also that certain states have “decoupled” from the federal Opportunity Zone regime, meaning they do not recognize or offer the benefits that one would obtain for federal taxes. States that have completely decoupled at this time include California, Massachusetts, Mississippi, and North Carolina. New York State has partially decoupled, disallowing the deferral of capital gains until December 31, 2026. Legislation has been introduced within the NYS legislature to completely decouple from the federal rules, though there is a strong lobby fighting against this change.

Opportunity Zone Fund investment guide by BSB Accountants & Advisors in Hauppauge, Long Island, NY

What Are the Risks of Investing in an Opportunity Zone Fund?

Like any investment, investing in an opportunity zone fund carries some risks. Opportunity zone funds may be investing in real estate or businesses located in economically distressed areas, which can be riskier than investing in more established markets. Additionally, there is a risk that the investments may not perform as well as expected, which could result in a lower return on investment or even a loss of principal.

It’s important for investors to carefully evaluate the investment strategy and track record of any opportunity zone fund before investing. Investors should also consider the fees and expenses associated with the fund, as well as the liquidity of the investment. Opportunity zone funds may have restrictions on when investors can withdraw their funds, which could impact their ability to access their capital if needed.

Conclusion – is this right for you?

Investing in opportunity zone funds can be a tax-efficient way for investors to defer and potentially eliminate capital gains taxes, while also supporting economic development in distressed areas of the country. However, investors should carefully evaluate the risks and potential rewards of any opportunity zone fund investment before committing their capital. It’s also important to work with a qualified financial advisor and tax professional to ensure that the investment aligns with your overall investment strategy and tax planning goals. If you think a qualified opportunity zone investment might be right for you, we can help you with the planning and tax reporting required to ensure that it is done correctly. Feel free to reach out to us to learn more.

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