Googling the term “opportunity fund” leads to approximately 194 million results, and the definition of still is not explicitly clear when delving through these results. Adding to the confusion are the websites, such as Enterprise Community Partners, pointing out that some opportunity funds are based on “a new provision in the Tax Cuts and Jobs Act”, and are “a new class of investment vehicles that aim to responsibly drive much-needed capital in distressed communities throughout the nation.” In other words, the Qualified Opportunity Funds (QOFs).
While the terms “Opportunity Funds” and “Qualified Opportunity Funds” might appear to be interchangeable, they are not.
What is an “Opportunity Fund”?
The answer is: It depends. “Opportunity fund” is a catch-all for the following:
- A personal savings account. Gary Pinkerton of Paradigm Life describes a real estate opportunity fund as a “growth and tax-efficient, liquid account where you hold your investment capital while evaluating potential deals . . . “ Such a fund is meant to encourage building up a personal “war chest” for investments, bargains or emergencies. This does not equal a QOF.
- A non-profit organization providing resources to lower-income areas and/or individuals or, as The Law Dictionary defines it: a “non-profit fund to help people on low incomes.” The idea is that small monetary amounts, combined with financial advice, can help drive change and economic mobility. These are worthy endeavors to which you donate, rather than invest. This is not the same as a QOF.
- Investment entities run by managers. As HDFC Life puts it, such a fund “invests in companies, sectors or investment themes, depending on where the fund manager anticipates growth opportunities.” The focus of such investment funds are a yield and return on investment, however without the powerful tax deferral/reduction/elimination benefits that QOF’s offer.
What is a “Qualified Opportunity Fund”?
- A QOF is any corporation or partnership with the sole purpose of investing in designated Qualified Opportunity Zones. These zones are in low-income communities, and money invested will go toward the betterment of these areas.
- The investment needs to be the capital gain proceeds from the sale or exchange of an asset in order to qualify for the tax benefits. An investment into a QOF also needs to be done within 180 days of that gain being realized.
- Investing in a QOF means that individuals can defer, and potentially reduce, tax payments on that invested gain avoiding capital gains entirely on the appreciation of the QOF investment, if held for at least 10 years. For example, if an individual invests $100,000 capital gain from the sale of a stock portfolio in a QOF, a deferral on capital gains tax until 12/31/26 (or sooner if the QOF investment is sold before that date) is eligible. However, if the $100,000 is held at least 10 years and it turns out to be worth $500,000, no capital gains taxes are due, resulting in a $400,000 net gain.
- QOFs can self-certify, per the IRS.
- QOFs must hold 90% of its assets in a specified Qualified Opportunity Zone.
- QOFs can invest in only three types of Qualified Opportunity Zone Property: Qualified Opportunity Zone Businesses Property; Qualified Opportunity Zone Stocks or Qualified Opportunity Zone Partnership Interests.