The Qualified Opportunity Zone Fund (QOF)
- The QOF Program was created by the Tax Cuts and Jobs Act in December 2017 and encourages long-term private sector investments in designated communities known as “Qualified Opportunity Zones.”
- The QOF Program offers significant tax benefits to investors.
- The Treasury Department published the final set of Opportunity Zone regulations on December 19, 2019 building upon two prior sets, released in October 2018 and April 2019, respectively.
WHAT IS A QUALIFIED OPPORTUNITY ZONE (QOZ)?
A designated census tract in the United States that has been selected by a state governor and certified by the U.S. Department of Treasury for inclusion in the QOZ Program. There are over 8,700 Qualified Opportunity Zones.
WHAT IS A QUALIFIED OPPORTUNITY ZONE FUND (QOF)?
An investment vehicle organized as either a partnership or corporation that holds at least 90% of its assets in QOZ property (the “90% Asset Test”). Qualified Opportunity Zone Funds can make investments in a wide variety of real estate or new or existing businesses, including commercial real estate, housing, infrastructure, and start-up businesses. QOFs can hold single or multiple assets.
QOF PROS:
- Capital gains taxes from the sale of any asset are eligible, not just from investment property. This includes gains from the sale of businesses, stocks, primary residences, artwork, crypto, etc.
- Only the gain itself is required to be reinvested. The Cost Basis is available today – tax-free – to the investor.
- No Qualified Intermediary is required.
- Investors who remain invested for the required 10-year holding period may receive 100% tax elimination from the ultimate sale of the QOF’s assets, regardless of the amount of profit.
- QOFs can include luxury housing communities, hotels, self-storage facilities, commercial properties, etc.
- Investors have 180 days from the sale of their assets to obtain this benefit.
- No further tax-deferral will be required upon exit.
- The Sponsors are usually subordinated to the investors. They only participate in the waterfall once the investors are made whole.
QOF CONS:
- You only have 180 days from the sale of the asset to reinvest the proceeds.
- The investment must be held for 10 years in order to get full tax elimination.
- Not liquid. No secondary Market.
- Difficult to predict the market conditions ten years from now.
- This tax-deferral option is going away soon, although Congress is considering extending it.
- Distributions don’t begin right away since QOFs are often new constructions that have to be stabilized.
- Taxes are deferred until April 2027.
The most immediate QOZ Tax Benefit is the ability to defer the recognition of capital gains invested in a Qualified Opportunity Fund until the Qualified Opportunity Fund investment is sold or December 31, 2026, whichever occurs first. There is no limit on the amount of gains that can be deferred in this manner. Investors generally must invest their capital gains within 180 days of when they are realized.
Investors who hold their investment for at least ten years pay no tax on gain from the sale of their Qualified Opportunity Fund investment (or their allocable share of gain from the sale of certain assets by the Qualified Opportunity Fund), regardless of the size of the potential gain.
QOZ Funds Examples
MULTIFAMILY
GK Opportunity Zone Fund I, LLC
The Project is expected to consist of 138 apartment units and is located in Sarasota, FL. This is substantially greater than the 69 units that were originally targeted before the Sponsor purchased both neighbors’ air rights and expanded their development by a factor of two.
HOSPITALITY
Peachtree Hotel Opportunity Zone Tax Advantage Fund II, L.P.
The Fund intends to pursue its investment objectives by developing, owning, operating, and disposing of real estate assets primarily consisting of premium-brand, limited-service, select-service and compact full-service hotels located in target QO Zones.
OIL/GAS ASSETS & DRILLING
USEDC Opportunity Zone Fund I LP
The Fund was created to raise capital for the purchase of oil fields predominantly (90%+) in the Permian Basin to be used for the extraction of oil & natural gas located in the Permian Basin of Texas.
MULTIFAMILY
Eagle OZ Fund II, LP
The purpose is investing in a portfolio of small- to medium-sized multifamily residential apartments located in Cook County, Chicago, Illinois-area opportunity zones.
