Qualified Opportunity Funds Invest in Qualified Opportunity Zones

A qualified opportunity fund (QOF) is an investment vehicle typically organized as a corporation or a partnership which must hold at least 90 percent of its assets in QOZ businesses and assets. From the date of sale of an appreciated asset that triggers taxable gains, an investor has 180 days to invest up to the amount of those gains in a QOF in order to reap the potential tax advantages of the Opportunity Zone Program.

Investors with taxable gains from the sale or exchange of virtually any type of property, including the following, may potentially defer gains by reinvesting the proceeds in a QOF within 180 days of the sale or exchange.

 

Stocks

 

Mutual Funds

 

Business

 

Art

 

Bonds

 

Real Estate

 

Jewelry

 

Cars

Potential Tax Benefits of Qualified Opportunity Funds

An individual who invests in a QOZ is eligible for favorable tax treatment in the form of both deferral and forgiveness. The potential tax benefits are summarized below.

tax Defer taxable income from gain until 12/31/2026
10+ Year hold on QOF (qualified opportunity fund) allows for complete tax elimination tax benefit

QOZ Investing Timeline

To clearly illustrate the tax benefits of a QOF, the hypothetical timeline example below shows how an investor triggered capital gains by selling an asset and invests their gains into a QOZ, receiving temporary deferral.

2023
Sale of Original Investment ($1M gains realized)

Investor realizes gain on original investment and invests gain into QOF

2026
Deferred Taxes Due 12/31/26

Investor pays deferred tax on original gain

2033
10-Year Exemption on $1M QOF Investment
Opportunity Zone
Program End *

Investor will not owe taxes on gains in the QOF investment

Source: https://www.nar.realtor/infographics/qualified-opportunity-zone-investors-timeline.

*QOF investment ends per terms outlined in the specific fund. If the Investor holds an interest in a qualified opportunity fund for at least 10 years then, in connection with the sale of such interest, the Investor’s basis in such interest will be equal to the fair market value of such interest on the date it is sold if a specified tax election is made, thereby eliminating any federal income tax with respect to any appreciation in the value of the interest.

Frequently Asked Questions

What qualifies as a Qualified Opportunity Zone?

Defined under the 2017 Tax Cuts and Jobs Act, QOZs are census tracts (permanent statistical subdivisions of a county) composed of economically disadvantaged communities, including a small percentage of tracts contiguous to low-income census tracts. With more than 8,700 QOZs identified, this source of untapped capital to revitalize underserved communities has attracted significant attention.

Source: https://eig.org/opportunityzones/facts-and-figures

How long do I need to hold my QOZ investment to benefit from the tax advantages?

After holding the investment for 10 years, investors will not owe any taxes on gains in the Qualified Opportunity Fund (QOF) investment.

Can I invest in a QOZ and invest in a 1031 exchange after the QOZ’s holding period expires?

Yes.

If I realized taxable gains on an investment, how much time do I have to invest into a QOZ?

An investor has 180 days to invest up to the amount of those gains in a QOF in order to reap the potential tax advantages of the QOZ Program.

For More Information

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Important Disclosures

Investments in offerings sponsored by Inland Private Capital Corporation (IPC) involve certain risks including but not limited to tax risks, general real estate risks, risks relating to the financing on the applicable property, if any, risks relating to the ownership and management of the property, risks relating to private offerings and the lack of liquidity, and risks relating to the QOZ and QOF structure. In addition, IPC can give no assurance that it will be able to pay or maintain distributions, or that distributions will increase over time.

QOZ Risk Factors to Consider

There are substantial risks associated with the U.S. federal income tax aspects of a purchasing interests in a qualified opportunity fund. The following risk factors summarize some of the tax risks to an investor. All prospective investors are strongly encouraged to consult with and rely on their own tax advisors. The tax discussion here is not intended, and should not be construed, as tax advice to any potential investor.

  • There is a lack of precedent and limited guidance related to qualified opportunity funds.
  • A program intended to qualify as a qualified opportunity fund may not constitute a qualified opportunity fund for a variety of reasons, including a failure to substantially improve the property within the first 30 months of its operation. If a fund does not qualify as a qualified opportunity fund, then no deferral or elimination of taxable gain will be available to the its members.
  • An investor must acquire his or her interest in a qualified opportunity fund on or before December 31, 2019 in order to receive a step-up in basis equal to 15% of the gain deferred by reason of the investment in the fund.
  • Investors who hold interests in a qualified opportunity fund through December 31, 2026, and who have deferred gain through that time by acquiring such interests, will automatically recognize some or all of the federal income tax gain that they deferred on December 31, 2026.
  • The state, local and other tax implications of a qualified opportunity zone investment are unclear.

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Investments in offerings sponsored by Inland Private Capital Corporation (IPC) involve certain risks including but not limited to tax risks, general real estate risks, risks relating to the financing on the applicable property, if any, risks relating to the ownership and management of the property, risks relating to private offerings and the lack of liquidity, and risks relating to the DST, QOZ and Qualified Opportunity Fund structures. This website is not intended as tax advice

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