How to form an Opportunity Zone fund
It’s important to remember that this fund has to have 90% of its assets in an opportunity zone.The IRS describes an opportunity zone fund as an investment vehicle that files either a partnership or corporation federal income tax return and is organized for the purpose of investing in qualified opportunity zone property. You can get and file Form 8896 from the IRS and create a qualified opportunity fund.
It can be structured as a partnership or corporation as long as the purpose is to invest in one of the opportunity zones’ census tracts, through real estate or in businesses through equity. But remember, the fund must hold the bulk -- 90% -- of its assets in an opportunity zone area.
In contrast to existing programs, opportunity funds can self-certify without needing a government agency to approve the fund. In this scenario, it’s the private-market fund managers that are responsible for managing the opportunity funds instead of investors or government agencies.
The great thing is that there is no limit to the number of opportunity funds that can be created or dollars that can be invested into it. This gives it the potential to become one of the largest programs aimed at developing low-income communities.
Recently proposed changes to Opportunity Zones
There was some clarification needed surrounding opportunity zones, so government officials relaxed some of the requirements that looked at hours, wages, or tangible property. For example, if at least 70 percent of the tangible property owned or leased by a trade or business is qualified opportunity zone property, it meets the requirement.
In April 2020, the IRS and Treasury issued its second round of regulations for qualified opportunity zones. With regulations evolving, it’s easy to get mixed up, which can result in lost funds. This proposed regulation was related to gains that may be deferred as a result of a taxpayer's investment in an opportunity fund, special rules for an investment in the fund held for at least 10 years, and updates to portions of previously proposed regulations under section 1400Z-2 to address various issues.
The latest proposed rules should help promote jobs, and it paves the way for investments in other businesses operating within the opportunity zones, aside from real estate. The businesses can qualify for the 50% gross income requirement if half of the company’s employee hours or wages are sourced in the zone.
The new regulations now spell out exactly how businesses can meet the 50% threshold with looser requirements that take into consideration businesses that operate within opportunity zones but get a large amount of business from other places. They can also satisfy the 50% test if at least 50% of the total amount the company pays for services performed goes toward services performed in the opportunity zone and the company’s tangible property and management or operational functions performed in the opportunity zone is necessary to generate 50% of its gross income.
Additionally, this recent set of proposed rules clarifies that a fund investing at least 90% of its assets in opportunity zone properties won’t lose its tax-advantaged status if it sells qualified property, stock, or partnership interests in the fund. However, there’s a catch. This is true just as long as it reinvests the proceeds in another qualified property within 12 months.
Qualified Opportunity Zones: in summary
Opportunity zones can be a great way to invest in real estate while helping improve communities in need of new development. While the tax benefits may lure you to invest in uncharted territories, it’s important to make sure you completely understand the intricate details of opportunity zones investing. Take into consideration that you must hold the property for a minimum of 10 years to receive a full tax-exempt status on your investment. This means the real estate market has the potential to go up or down during that time.
This economic development tool and tax haven holds massive potential for those involved. If opportunity zones work as intended, they will offer tax incentives to investors shifting capital into undercapitalized communities of the country. If you are interested in investing in an opportunity zone, it’s important to identify a fund to invest in sooner rather than later to take full advantage of the tax incentives available. There are high hopes for a positive impact in areas of need as this investment opportunity continues to unfold over the next decade. For more information about opportunity zone funds, please check out our Opportunity Zone FAQ here.