How to Start a Qualified Opportunity Fund?
When the U.S government laid out strategies to boost economic development in the country, it enforced a new program through the Tax Cuts and Jobs Act 2017. This program was targeted at poorly developed regions and aimed at incentivizing investors to direct their resources towards these areas.
These regions are called opportunity zones, and the investing entity is called an opportunity fund. Any investor can direct their finances towards such a fund. However, for you to stand to receive the accruing benefits, this fund must be qualified. So would you go about establishing a qualified opportunity fund?
Opportunity Zones in the U.S
Presently, there are slightly over 8700 opportunity zones in the U.S, 28 of them being in Idaho. These zones are characterized by:
• Low-income households with a median of $49,900 compared to the national median of $77,300
• Higher poverty levels of 26.4% compared to the 13.4% national rate
• Fewer grown-ups with a high school diploma and a bachelor’s degree compared to the national averages
• Increased possibility for crime as a result of these factors
• A higher population of people of color compared to other regions in the country
How does the opportunity fund work?
One of the ways that any government stimulates economic growth is by offering perks to investors. To spark manufacturing, the industry policy is being revisited with a look to support the sector. Similarly, to direct focus on the lower-income zones, the opportunity fund was designed to allow investors to benefit from capital gains, tax reductions, and exemptions.
To explain it simply, assume that you disposed of an asset such as a business, real estate, or investment. The sale of this asset generated capital gains that would be subject to tax liability. Directing these capital gains to an opportunity fund would allow you to either suspend or reduce the tax liability while adding to your investment portfolio and making a positive impact.
What is a qualified opportunity fund?
A qualified opportunity fund is one that is established either as a corporation or partnership, with the aim of investing in Qualified Opportunity Zone property (aside from another Qualified Opportunity Fund). The entity must hold about 90% of its investments in Qualified Opportunity Zone real estate.
Moreover, it is expected that the fund will continue to invest in the development of this property for a period of time. To be certified as a QOF, you must annually file your federal income tax return as a corporation or partnership.
Benefits of investing in an opportunity fund?
The tax benefits accruing to investors include:
• Deferral of taxes on previously earned capital gains up to the end of 2026 or when the asset is disposed
• An increase in the investor’s basis on the original investment by 10% for capital gains placed in an opportunity fund for about 5 years, and 15% for at least 7 years
• A total exemption from tax on capital gains if the investment was held for longer than 10 years
The tax benefits aside, the opportunity fund program has already seen an increase in annual private capital directed to opportunity zones and an increase in home value.
Long-term investments are more than just stocks and bonds. Even with real estate and other tangible assets, you must be prudent to derive the most optimal returns from them. Savings on capital gains through investing in QOZ property, while a new provision in the market, have been seen to have promising results. To invest as a QOF, simply align your entity with the qualifying conditions and make your way to a better life not just for you but for the citizens in the opportunity zones as well.
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