Investing In Jackson Heights: Opportunity Fund Guide

Investing in opportunity funds is a great way to boost your financial portfolio while also supporting the revitalisation of economically distressed communities. The opportunity fund initiative was established by the 2017 Tax Cuts and Jobs Act, which incentivises investment in underfunded, low-income communities through tax benefits. By investing in opportunity zones, investors can defer and potentially reduce their tax payments on capital gains. To qualify, at least 90% of the fund's assets must be invested in designated opportunity zones, and substantial improvements must be made to the properties, defined as investments equal to the original value of the property. Jackson Heights, like all opportunity zones, has been certified by the Treasury Department as qualifying for this program.

Understanding Opportunity Zones

Opportunity Zones are tax incentives to encourage those with capital gains to invest in low-income and undercapitalized communities. The 2017 Tax Cuts and Jobs Act created the Qualified Opportunity Zone program to provide a tax incentive for private, long-term investment in economically distressed communities. Opportunity Zones are designated by the state and certified by the Treasury Department as qualifying for this program. Zones can be found in all 50 US states, Washington, D.C., Puerto Rico, and four US territories.

To be classified as an Opportunity Zone, a community must be nominated by a state, the District of Columbia, or a US territory, and that nomination must be certified by the Secretary of the US Treasury via the Internal Revenue Service (IRS). These zones are identified by state, county, and census tract numbers.

The program provides three tax benefits for investing unrealized capital gains in Opportunity Zones:

• Temporary deferral of taxes on previously earned capital gains: Investors can place existing assets with accumulated capital gains into Opportunity Funds. Those existing capital gains are not taxed until the end of 2026 or when the asset is disposed of.
• Basis step-up of previously earned capital gains invested: For capital gains placed in Opportunity Funds for at least 5 years, investors’ basis on the original investment increases by 10 percent. If invested for at least 7 years, investors’ basis on the original investment increases by 15 percent.
• Permanent exclusion of taxable income on new gains: For investments held for at least 10 years, investors pay no taxes on any capital gains produced through their investment in Opportunity Funds.

Opportunity Zone tax incentives can be used for commercial and industrial real estate, housing, infrastructure, and existing or start-up business investments. To qualify for tax incentives, real estate projects must result in the properties being "substantially improved". This means that the improvements must exceed the Qualified Opportunity Fund's initial investment into the existing property over a 30-month period.

Certain types of businesses cannot be included in opportunity funds, even if they reside within opportunity zones. These include racetracks, other facilities used for gambling, golf courses, country clubs, massage parlors, hot tub facilities, suntan facilities, and liquor stores.

Tax Benefits of Investing in Opportunity Funds

The 2017 Tax Cuts and Jobs Act established the Qualified Opportunity Zone program to provide tax incentives for private, long-term investment in economically distressed communities. These tax incentives are available for investors who invest in Qualified Opportunity Funds. Here are the tax benefits of investing in Opportunity Funds:

Temporary Deferral of Taxes

Investors can temporarily defer taxes on eligible gains they invest in a Qualified Opportunity Fund. This deferral is applicable until an inclusion event occurs or until December 31, 2026, whichever comes first. Eligible gains refer to capital gains and qualified 1231 gains recognized for federal income tax purposes before January 1, 2027, and not arising from transactions with related persons.

Basis Step-Up of Deferred Gains

The longer an investor holds their investment in a Qualified Opportunity Fund, the greater the step-up in tax basis they receive. If the investment is held for more than five years, investors get a 10% step-up in tax basis. Holding the investment for over seven years results in an additional 5% step-up, leading to a total of a 15% step-up in tax basis.

Permanent Exclusion of Taxes on Appreciation

If an investor holds their investment in a Qualified Opportunity Fund for at least ten years, they may permanently exclude taxes on the appreciation of their investment. This means that after a decade, investors do not owe federal income taxes on the fund's gains by the date of sale or exchange.

How to Start Investing in Opportunity Funds

Investing in opportunity funds can be a great way to diversify your portfolio and support economically distressed communities. Here are the steps to start investing in opportunity funds:

Understand Opportunity Funds and Zones

Firstly, it's important to understand what opportunity funds and zones are. Opportunity funds are investment vehicles designed to invest in real estate or business development in designated "opportunity zones." These zones are particular geographic areas that have been identified as economically distressed and may be subject to different economic regulations. The opportunity funds aim to rehabilitate these regions while providing investors with tax advantages and benefits.

Identify Qualified Opportunity Zones

To invest in opportunity funds, you need to identify qualified opportunity zones. These zones are typically low-income or economically distressed areas that have been nominated by the state and certified by the U.S. Treasury Department. You can find a list of qualified opportunity zones on the U.S. Department of the Treasury or the IRS website. Zones are identified by state, county, and census tract numbers.

Choose Your Investment Vehicle

Opportunity funds can be set up as partnerships, LLCs, S-corps, or C-corps. You can choose to start your own opportunity fund or invest in existing ones. If you're starting your own, you'll need to create the entity, file Form 8996 with the IRS, and ensure ongoing compliance with the various requirements. If you're investing in an existing fund, you can choose between single-asset investments or multi-asset funds that spread your investment across different properties, businesses, or geographies.

Reinvest Capital Gains

To take advantage of the tax benefits offered by opportunity funds, you must reinvest your eligible capital gains into the fund within 180 days of realizing the gain. Only capital gains or qualified 1231 gains (gains on certain business properties) recognized for federal income tax purposes before January 1, 2027, are eligible. Additionally, these gains cannot be from transactions with a related person.

Understand the Tax Benefits

Opportunity funds offer several tax advantages. Firstly, they allow you to defer your capital gains taxes until December 31, 2026. Secondly, the longer you hold your investment, the greater your tax benefit. If you hold your investment for more than five years, you receive a 10% exclusion on your deferred gain. If you hold it for more than seven years, you get a 15% exclusion. Finally, if you hold your investment for at least ten years, you won't owe any federal income taxes on the fund's appreciation when you sell it.

Consult Professionals

Before investing in opportunity funds, it's essential to consult tax and financial advisors who are well-versed in this area. They can help you navigate the rules, consider potential implications, and ensure you're filing the appropriate paperwork. Additionally, due diligence on your part is necessary, as these funds aren't rated by typical fund rating agencies.

Compliance Requirements for Opportunity Funds

To be a Qualified Opportunity Fund, an investment fund must meet several compliance requirements. Firstly, it must be set up as a corporation or partnership with the specific purpose of investing in Qualified Opportunity Zone Property. This can be done by filing IRS Form 8996 with the fund's federal income tax return.

Secondly, to maintain its status as a Qualified Opportunity Fund, the fund must invest at least 90% of its assets in Qualified Opportunity Zone Property. This is determined by the average percentage of Qualified Opportunity Zone Property held in the fund on the last day of the first 6-month period of the fund's tax year, and the last day of the fund's tax year.

Thirdly, Opportunity Zone Property must be either original use, such as new construction, or a substantial improvement of existing property. This requirement is typically met when the basis of a property is doubled. For example, if an investor purchases a building for $1 million and invests at least an additional $1 million in improvements. There are also additional requirements around the date of purchase, which must be after December 31, 2017, and prohibitions on "related party" acquisitions, meaning you cannot sell a property to yourself or a family member.

Finally, there are mandatory reporting requirements for both individual investors and QOF directors or partners. Individual investors must file IRS Forms 8949 and 8997 alongside their annual tax return, while QOF directors or partners must return Form 8996 annually for the QOF to self-certify as a qualifying fund.

The Impact of Opportunity Funds on Communities

Opportunity funds are investment vehicles designed to invest in real estate or business development in economically distressed areas known as "opportunity zones". These zones are particular geographic areas that have been designated as economically distressed by the state and certified by the Treasury Department. The purpose of opportunity funds is to rehabilitate these regions while also providing investors with certain tax advantages and benefits.

Economic Development and Job Creation: Opportunity funds are designed to spur economic growth and job creation in low-income and distressed communities. By investing in real estate and business development in these areas, opportunity funds can help to revitalize local economies, create jobs, and attract further investment. This can lead to increased tax revenue for the community, improved infrastructure, and a higher quality of life for residents.

Tax Benefits for Investors: Opportunity funds offer tax incentives for investors, such as delayed and reduced taxes on capital gains. Investors can defer their tax payments on prior investment gains if they invest those gains in a qualified opportunity fund within 180 days of the sale. Taxes can be deferred until the fund investment is sold or exchanged, or until December 31, 2026, whichever comes first. Additionally, if an investment is held for longer than five years, investors receive a 10% exclusion on their deferred gains, and if held for more than seven years, they receive a 15% exclusion. After 10 years, investors do not owe federal income taxes on the fund's appreciation by the date of sale. These tax benefits can provide significant financial savings for investors, encouraging them to invest in opportunity zones.

The specific rules and regulations for investment in and taxation of qualified opportunity funds may be subject to change over time. Therefore, it is essential for interested investors to consult with investment and tax professionals before participating in these funds.

Frequently asked questions