Opportunity Funds
Opportunity Funds were established as part of the December 2017 tax reform legislation. Recent IRS proposed regulations around this incentive were released in October 2018 and updated in April of 2019. Final regulations have not been released, but there has been some movement in the real estate industry to establish Opportunity Funds, which in turn invest into Opportunity Zones. Here are the basics:
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Similar to a 1031 exchange, taxpayers can defer capital gains tax when gains are invested into an opportunity fund.
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Established opportunity funds then invest into local opportunity zones (distressed urban and rural areas). Here is a link to a full map of opportunity zones:
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Investors have 180 days from their capital gain sale to invest into an Opportunity Fund.
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The opportunity fund then acts as an investment vehicle to invest in tangible property within an opportunity zone.
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Property must be purchased by the fund within a 6 month period of the fund’s tax year-end and held within the fund on the last day of the fund’s tax year-end.
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The investment must be significantly improved within 30 months beginning after purchase (i.e. remodel building). Additions or improvements must exceed an amount equal to the adjusted basis of the property purchased.
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Opportunity Funds are established as partnerships or corporations. These Funds are then used to invest into qualifying business property located in an opportunity zone. The key statutory requirements are as follows:
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At least 90% of the qualifying business property assets must be located in the zone (i.e. a rental building).
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At least 70% of the property must be used in the opportunity zone business (i.e. use the assets in a qualified business).
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The investor must retain its original investment in the fund at all times to continue the gain deferral and other benefits.
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10% of the deferred gain is permanently eliminated if held for 5 years prior to 12/31/2026.
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Additional 5% of the deferred gain is permanently eliminated if held for 7 years prior to 12/31/2026.
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If the investment is held for at least 10 years, the investor is able to a step up in basis to FMV (on the initial qualified gain investment).
To learn more about Opportunity Zone investments, set up a consultation with a Blystone & Bailey professional by calling 989-772-4673 or via e-mail at blystonebailey@blystonebailey.com