While it is clear that there are many benefits to investing in opportunity zones, and anyone can invest, it’s not always clear how to make this investment. The qualified opportunity zone program devised by the Tax Cuts and Jobs Act of 2017 offers investors various tax benefits for investing in opportunity zones. As a novice, it can be quite overwhelming, trying to figure out how to invest in opportunity zones. There are several things to factor in, such as how the investment will perform and its risk level. To help you out here’s a guide to opportunity zone funds.
How a qualified opportunity zone program works
Instead of using tax dollars to stimulate economic growth in these distressed communities, the federal government opted to use private investments to stimulate growth. To promote private participation, the government passed an act that makes investors in a qualified opportunity zone qualified for tax incentives. To make the most of this program, you must invest your capital gains into a qualified opportunity zone fund. This has to happen within six days of the sale, and despite you investing the returns from your sales as well as potential gains, the tax incentives only apply to the capital gains. However, you can use the proceeds from the sales however you wish; it’s not a requirement for you to invest them back or invest in a like-kind asset to defer potential gains.
What is a qualified opportunity fund (QOF)?
Once you have recognized a property or properties to invest in, you have to ensure that you can access a qualified opportunity zone fund in that market. A qualified opportunity fund is an investment tool that files a partnership or federal income tax return designed to be used to invest in a qualified opportunity zone property. You have two options self-certify or locate a qualified opportunity zone fund. To become a QOF or self-certify as a one, an eligible partnership or cooperation files an annual filing by submitting form 8996 along with its federal tax return documents. This form also helps measure existing QOFs to ensure they met the requisite standards in the previous year. Alternatively, you can turn to several qualified opportunity zone funds. There are many funds that focus on large markets and multifamily properties. Investing in an already established QOF can come at a cost, so many experienced investors prefer self-certifying as they save on investment fees and have more control over their investments.
As with any investment, some risks come with investing in opportunity zones. The biggest one is the viability of investing in that zone. Just because there are tax incentives in place, it doesn’t mean the investments will be profitable. The location of the property matters so looks for a fund with diversified assets in different opportunity zones. Additionally, to fully realize the tax benefits offered, you must roll a portion of your capital gains into an opportunity fund.
If you are curious about investing in opportunity zones, continue learning more about these zones and QOFs. Also, look into other risks involved and search for potentially profitable zones. With a proper opportunity fund, you can make good investments and take full advantage of these tax reduction incentives.
