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An Opportunity Zone is an economically-distressed community where these new investments, under certain conditions, may offset IRS taxes. Localities qualify as Opportunity Zones if they have that designation by the state and are certified by the Secretary of the U.S. Treasury by the Tax Cuts and Jobs Act on December 22, 2017.
This is a tax benefit to high net worth investors. First, investors can defer tax on any prior gains invested in a Qualified Opportunity Fund (QOF) until the earlier of the date on which the investment in a QOF is sold or exchanged, or December 31, 2026. If the QOF investment is held for longer than 5 years, there is a 10% exclusion of the deferred gain. If held for more than 7 years, the 10% becomes 15%. Second, if the investor holds the investment in the Opportunity Fund for at least ten years, the investor is eligible for an increase in basis of the QOF investment equal to its fair market value on the date that the QOF investment is sold or exchanged.
Locations of the zones is designated by census tract within boundaries set by the 2017 Act
2018-48 (PDF) and in 2019-42 (PDF). Further, a visual map of the census tracts designated as Qualified Opportunity Zones may also be found at Opportunity Zones Resources.
A Corporation or LLC can become an Opportunity Zone Fund by filing with the IRS and investing half its interests into census tract projects that can be land, residential, commercial and multi use. Most of these Funds are new and according to Preqin's report only thirty percent of the managers are experienced managers. Investing in distressed locations, blighted rural land and failed projects is dirty hard work to make a profit on the real estate investment. Fund Managers approach the very wealthy who have capital gains to offset into such a fund. Investors must have a minimum of a million dollars in assets not including their primary residence, This unregulated investment is of the highest risk for capital loss rather than gain, it only feels like a vehicle to avoid paying income taxes in a given year, which could be pushed out as far as 12/31/2026
The highest number of QOF projects are in the Western States. The majority of projects are multi family residential and commercial. There is no certification for these funds. To be successful, to stay afloat and not have the fund disqualified they must be: 1. savvy accountants to follow all the Internal Revenue Service's rules and regulations and 2. be excellent at choosing locations 3. be knowledgeable in construction, trades, operating rentals, finding tenants, and have solid legal knowledge of leases, mortgage lending, and operating the properties. It's difficult to imagine a start up company being able to expertly manage a variety or real estate holdings in different locations.
Buyer be careful.
