Qualified Opportunity Zone Funds
The country now has over 8,700 Opportunity Zones in every state and territory,
accounting for roughly 10% of America's land mass.
What are Opportunity Zones?
Opportunity Zones are low-income census tracts nominated by state governors and certified by the U.S. Department of the Treasury.
These designated zones allow investors to put capital to work financing new projects and enterprises in exchange for certain federal capital gains tax advantages.
Qualified Opportunity Zone Funds (QOZ Funds)
QOZ Funds are private sector investment vehicles that invest at least 90 percent of their capital in Opportunity Zones.
These Funds provide investors the chance to put that money to work rebuilding the nation’s underdeveloped communities.
The fund model enable investors to pool their resources, increasing the scale of investments.
Tax Incentives That Encourage Investment
Temporary Tax Deferral
Capital gains reinvested in an Opportunity Zone Fund will be deferred and recognized on the earlier of the date on which the opportunity zone investment is sold or December 31, 2026.
Permanent Gains Exclusion
Capital gains from the sale or exchange of an investment in a qualified opportunity zone fund, will be excluded from taxation if the investment is held for at least 10 years.
QOZ FUND TIMELINE
Reinvest capital gains proceeds within 180-days and begin deferring tax.
PAY TAXES OWED
The tax holiday ends on December 31, 2026 and taxes on the original capital gain must be paid when filed in 2027.
Tax Free Gains
Pay no federal captial gains taxes on the gain from the sale of QOZ Fund investments which are held for more than 10 years.
A Wide Variety of Development Options
OIL & GAS
QOZ Funds often invest in the ground up development of real estate and other assets such as Oil and Gas. Once properties are built and occupancies stabilized it is anticipated that funds will provide an income stream commeasurate with rental income generated. Typically the income is tax advantaged through use of cost segregation, depreciation and other pass through deductions.
Cost segregation is the process of identifying and segmenting property into types of assets where the depreciation and deductions can be accelerated in the first several years rather than the typical depreciation schedule of 27.5 or more years. One of the benefits of QOZ Funds is that there is no recapture of depreciation at the end of 10 years.
Qualified Opportunity Zone Funds are multifacited offerings. Some focus on specific propery types while others provide a more diversified exposure. Popular sectors include multifamily, storage, student housing, life sciences and Oil and Gas. In addition, some offerings are singular properties that are to be developed while others may be 10 or more assets in a single portfolio in what is referred to as a blind pool. The types of properties they seek to develop are identified, but actual properties have yet to be acquired.
In addition to differentiation by investment type, programs also differ by target liquidity events. Some have expectation of financing that will be implemented to return a portion of investor capital in the first 5 years once the properties have been stabalized by income producing tenants.
The Power of Tax Free Compound Growth
QOZ Fund Hypothetical Illustration
Two investors each sell an asset that generates a $1,000,000 long-term gain.
Pays capital gains taxes and invests the remaining capital in a product that generates a 10% compounded annual return over ten years and then liquidates the investment.
Invests the gain in a Qualified Opportunity Fund, which generates the same return over the same time period.
Both investors are residents of a state that conforms with the QOZ Program and are subject to the top marginal U.S. federal income tax rate of 20% on long-term capital gains for individuals, the net investment income tax of 3.8% and a state tax of 6.2%, for a total tax liability of 30%.
1 This illustration assumes the investor is subject to the top marginal U.S. federal income tax rate of 20% on long-term capital gains for individuals, the net investment income tax of 3.8% and a state tax of 6.2% for a total tax liability of 30%. No brokerage or investment advisory fees are accounted for with respect to the none are accounted for with respect to the QOF example.
2 This assumes that the QOF investor is a resident of a state that conforms with the QOZ Program.
3 Assumes that the investor has no capital losses to reduce such capital gain and refers to the inclusion of the original, invested capital gains in such investor’s taxable income on December 31, 2026.