Frequently Asked Questions about Opportunity Funds

Answers to the most commonly asked questions about Opportunity Zone Funds

Like with any new investing entity, there is still a fair bit of confusion about how opportunity zone benefits work. As you can imagine, there are some very specific rules for what is and is not allowed. For example, you actually can not invest directly in an opportunity zone and receive the benefits. You must invest in an opportunity zone fund instead, which in turn deploys capital on your behalf. Here are some of the most common questions we see about opportunity zone funds:

Can I invest my capital gain from the sale of stock?

Yes. Opportunity Funds allow you to invest the gain from the sale of capital assets. Examples include:

  • Real estate
  • Intangible property
  • Business equipment
  • Stocks, bonds, mutual funds, and related financial instruments.

If you are not sure whether or not you are selling a capital asset, ask your CPA. 

How does the benefit work?

The capital gain is deferred until 2026 that which time that capital gain will have to be recognized. If you hold it for the five or seven-year period, your taxable capital gain will be reduced by 10 to 15%, but that short-term gain will still be a short-term gain. The original gain that you deferred will be a short-term gain that's recognizable in 2026 or when you sell it if you sold it earlier. But the 10-year benefit is the gain from the opportunity fund investment itself. 

Example: If you were to have a $100,000 gain and you held it in an opportunity zone fund until 2026, that gain would be recognized in your 2026 tax return. But now, let's say that 10 years down the road that the investment appreciates to $230,000. Right then, you're going to have $130,000 capital gain on the opportunity fund investment itself, and that $130,000 gain is going to be what's exempt after 10 years from taxes. 

Are these gains also exempt from state and local taxes? 

It depends on the state and locality. Most of the states in the country are currently conforming either partially or fully. Some have yet to make an announcement or verify or confirm that they are going to conform with these rules. So it just depends from state to state.

How does the 180-day window for re-investing capital gains work? What is the date used to calculate this? 

The 180-day window for re-investing starts when you sell the asset, and you would have to re-invest the gains before the 180 days are up. There is no official guidance on the date to use as the re-investment date from the IRS or Treasury yet. However, our best judgment is that the date you consider being invested would be the date that the qualified opportunity fund receives the money, which would usually be the date of your wire (usually the same day). When investing with a CRE platform, it's important to note that this is the date when you wire the funds, not the date you submit the offer. You don't need to have the capital gains ready at the moment you make your offer, but they do need to be used to submit the funds. 

How do I document this for my taxes? 

IRS Form 8949 is used to document which capital gains are used for the investment, and you submit this when you file your tax returns. The statement you have from your brokerage that shows the date the stock was sold would be sufficient as documentation.

During the 10-year period, are distributions from the project in the opportunity zone tax-exempt?

No, the distributions during the life of the project before it hits the 10-year mark or even after it hits the 10-year point are still taxed at ordinary rates. It's the capital gains --the increase in the value of the asset itself -- that is tax-exempt. However, depending on the investment, any passive losses that are generated from the first few years of the investment or some of your other investments may offset that income over the course of the investment.

You will have to pay state taxes on these distributions during the course of the investment in the state where the investment is located, but you will not be taxed in both that state and your home state (if those two states are different). You will receive a K-1 form for each year that you are invested in the opportunity zone fund, starting with the first year.

How do I get certified as a Qualified Opportunity Fund?

New regulations allow taxpayers to self-certify as an Opportunity Fund using Form 8996. This form is currently in its draft stage, and instructions can be found on the IRS website. Note that if you have an opportunity fund, you can't invest in another opportunity fund. You'd have to invest directly in the operating entity itself. You can invest as an individual in qualified opportunity zone funds. 

Can I use an SDIRA (self-directed IRA) to invest in an opportunity zone?

In some investments you could, if the sponsor allows it, but the qualified opportunity zone has the tax benefits to it already so by using your SDIRA, you would be eliminating the benefit of the qualified opportunity fund itself.

Do any Qualified Opportunity Funds currently exist?

Yes, early adopters have already started using Opportunity Funds, but investments are mainly relationship-based at this point.

Many well-known investment firms have announced plans for Opportunity Funds, including Fundrise Cadre, and Crowdstreet.

Is there an expiration date?

Yes. The tax benefits expire Dec. 31, 2026, and no gain deferrals will be available after this date. This means, in order to maximize tax benefits, you must make your Qualified Opportunity Fund investment by Dec. 31, 2019. Doing so will allow seven full years to elapse, granting you a 15% step-up in basis, before the tax benefits expire.

The new regulations add more flexibility by allowing the QOF to hold these funds for up to 30-months as long as an investment plan for these funds exists.

They also state that taxpayers are still able to exclude gain from their eligible Opportunity Fund investment as long as it's sold prior to Dec. 31, 2047.

Can investors receive the 10-year capital gains exclusion on their Opportunity Fund investments if they invest with cash, instead of capital gains proceeds?

No. Investors can invest more than just tax-deferred capital gains into Qualified Opportunity Funds (QOF), but only investments made with tax-deferred proceeds or a tax-deferral election will be eligible for the capital gains tax exclusion on gains from their QOF investment.

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