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Ask Millionacres: Should I Start an Opportunity Zone Fund?

Jun 22, 2020 by Tara Mastroeni
Q: Should I open an opportunity fund? I have enough capital gains from the end of 2019 and the beginning of 2020. I’m also an accredited investor, with about a million dollars worth of stocks. -- Chris

Hi Chris,

As an accredited investor, you're likely better set up than some others to start an opportunity fund investment. However, like any investment, starting an opportunity zone fund can be a risk.

On the one hand, there is the potential for a three-fold tax break. First, you can use an opportunity zone fund as a way to defer federal capital gains tax from another investment by investing those gains into a fund. Second, the longer you keep your investment in the fund, the more you can reduce the amount of deferred gain that will be subject to tax. Third, if you hold the investment for ten years or more, any gain that you earn from your investment in the fund will be tax-free.

On the other hand, since the IRS guidelines around qualified opportunity fund (QOF) investment are still evolving, starting an investment vehicle of this nature can be a headache. Put simply, if you don't end up complying with the ever-changing guidelines, you may have to pay a penalty, or worse, you may end up finding yourself ineligible for the tax benefit. Aside from that. investing in a designated opportunity zone is inherently risky. There's no guarantee that you will see gains from an opportunity zone project.

In the end, it's up to you to weigh those benefits against the risks to decide whether you want to start your own fund. If you do decide to move forward with starting a fund, keep the following pieces of advice in mind:

  1. You need to be sure the business deal that you ultimately choose to invest in makes sense, regardless of the tax break. It needs to be able to make money, and you need to be able to show how it's going to give a return to your investors.
  2. The project needs to have a measurable degree of impact in order to qualify for the tax incentive. That impact needs to be calculable.
  3. You need to put together the right team of experienced professionals. Your fund manager should have experience with the opportunity zones program, and your developers and contractors should have experience working within the eligible census tracts and should have ties in those communities.

Good luck!

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