QUALIFIED OPPORTUNITY FUND
On December 22, 2017, Congress enacted H.R. 1, also known as the “Tax Cuts and Jobs Act” (the “TCJA”). Among many other provisions, the TCJA established a new tax regime for investments in vehicles established for the purpose of acquiring “qualified opportunity zone property.” These vehicles are referred to as “qualified opportunity funds” or “QOFs.” The tax regime is referred to as the “QOF program.”
Qualified Opportunity Funds (“QOF”) are basically the vehicle by which investors can participated in Opportunity Zones.
The IRS define a Qualified Opportunity Fund as:
“An investment vehicle that is set up as either a partnership or corporation for investing in eligible property that is located in an Opportunity Zone and that utilizes the investor’s gains from a prior investment for funding the QOF”
Investors qualify for significant tax benefits if they re-invest capital gains from the sale of an asset into a QOF either: (i) within 180 days of the asset sale if they were the direct owner of the asset or (ii) within 180 days of the end of the partnership year if the capital gains were generated by a partnership or an LLC owned or invested into by the investor.
A QOF portfolio must have at least 90% of its assets in Qualified Opportunity Zone Assets (“QOZAs”). QOZAs are investments into either (i) existing or new commercial real estate properties located in an Opportunity Zone or (ii) existing or new operating companies located and doing business in Opportunity Zones.
Opportunity Zones were selected by each state from census tracts that have at least a 20% poverty rate and average household income less than 80% of that state’s average household income.
QOZ property generally includes direct and certain indirect interests in businesses or property located in a population census tract that is (i) a low-income community (or contiguous with a low-income community) located in a state or possession of the United States and (ii) designated as a qualified opportunity zone by the applicable state or possession and approved by the U.S. government. Investing into CRE requires that the properties either be Original Use developments or be significantly renovated, while investments into companies require that the companies be newly founded or the investment be working capital
It is estimated that there are more than $6.1 trillion of potential unrealized capital gains that could be invested in QOFs, representing a significant untapped resource for economic development. In addition to the potential tax benefits to investor, investing in qualified opportunity zones can benefit these underserved areas, as substantial real estate investment in qualified opportunity zones can assist in creating the infrastructure and economic growth necessary for attracting new business and investments to these areas, thereby, creating a cycle of economic growth.