What is an Opportunity Fund?
An opportunity fund is an investment vehicle designed to invest in real estate in areas known as "opportunity zones." Opportunity zones are specific geographic areas designated as economically distressed. Tax incentives for investments in opportunity zones include delayed and potentially reduced taxes on capital gains.
Opportunity Funds Explained
Opportunity zones were created as part of the 2017 Tax Cuts and Jobs Act to encourage investment in underfunded, low-income and distressed communities. In order for a community to be classified as an opportunity zone, it must be designated by the state and subsequently certified by the Secretary of the U.S. Treasury, via the IRS.
An investment fund created by a corporation or partnership can become designated as a qualified opportunity fund by filing IRS form 8996 with their federal income tax return. Once designated, the fund must invest at least 90% of its assets in designated opportunity zones in order to receive preferential tax treatment.
Investing in Opportunity Zone Properties
Opportunity funds must make "substantial improvements" to the properties in which they invest. The Tax Cuts and Jobs Act defines substantial improvements as investments in the property that are equal to the original value paid by the fund. These must be made within 30 months. For example, if a property is purchased for $700,000, the opportunity fund has a 30-month window to make at least $700,000 worth of improvements.
Certain types of business cannot be included in opportunity funds, even if they reside within opportunity zones, including:
- Golf courses
- Country clubs
- Massage parlors
- Hot tub facilities
- Suntan facilities
- Racetracks or other facilities used for gambling
- Liquor stores
Investors can defer their tax payments on prior investments' gains if those gains are then invested in a qualified opportunity fund within 180 days after sale. Taxes are then deferred to either the day the opportunity fund investment is sold or exchanged, or December 31, 2026- whichever comes first.
Tax Advantages of Qualified Opportunity Funds
Beyond the ability to defer taxation of previous gains, the longer a participant holds their qualified opportunity fund investment, the smaller their tax burden may be.
- If held for longer than five years, investors receive a 10% exclusion of the deferred gain on their investment.
- If an investor holds for more than seven years, they receive a 15% exclusion.
- After 10 years, the investor does not owe federal income taxes on the fund's appreciation by the date of sale.
As of 2019, the IRS and the U.S. Treasury were still adjusting specific rules and regulations for investment in, and taxation of, qualified opportunity funds. Investors interested in participating should consult investment and tax professionals.
Where to Find Qualified Opportunity Zones
Opportunity zones currently exist in all 50 U.S. states, as well as Washington DC and five U.S. territories. To view all qualified opportunity zones, search the list below, or visit the U.S. Department of the Treasury for the most up to date listings. Zones are identified by state, county, and census tract number.
To determine a specific address's census tract number, visit the U.S. Census Bureau's Geocoder. Enter the address you'd like to find, and select "ACS2015_Current" from the drop-down menu of available datasets to search.