Qualified Opportunity Zone Funds

Summary

Defined under the 2017 Tax Cuts and Jobs Act, qualified opportunity zones (QOZs) are census tracts (permanent statistical subdivisions of a county) composed of economically disadvantaged communities, including a small percentage of tracts contiguous to low-income census tracts. With more than 8,700 QOZs identified, this source of untapped capital to revitalize underserved communities has attracted significant attention.

How to Invest in Qualified Opportunity Zones

A qualified opportunity fund (QOF) is an investment vehicle typically organized as a corporation or a partnership which must hold at least 90% of its assets in QOZ businesses and assets. From the date of sale of an appreciated asset that triggers taxable gains, an investor has 180 days to invest up to the amount of those gains in a QOF in order to reap the potential tax advantages of the Opportunity Zone Program.

Investors with taxable gains from the sale or exchange of virtually any type of property (e.g., stocks, bonds, mutual funds, real estate, businesses, art, jewelry, automobiles) may potentially defer gains by reinvesting the proceeds in a QOF within 180 days of the sale or exchange.

The Future of the Qualified Opportunity Zone Program

The Qualified Opportunity Zone (QOZ) Legislation, introduced as part of the 2017 Tax Cuts and Jobs Act, aimed to incentivize investment in low-income communities. Over the years, it has garnered bipartisan support and successfully attracted significant capital. Per Novogradac, QOZ Funds have raised approximately $36.1 billion, with estimates suggesting the actual amount may be much higher, between $108.3 billion to $144.4 billion (figures as of December 31, 2023). Despite its positive impact, data on the communities benefiting from QOZ investments is limited.

The Opportunity Zones Transparency, Extension, and Improvement Act (Extension Act) is a significant proposal to amend the Qualified Opportunity Zone (QOZ) Legislation. Introduced in April 2022 with bipartisan support from key proponents of the original legislation, Republican Senator Tim Scott and Democratic Senator Corey Booker, the Extension Act includes six key provisions:

1. Extending the capital gains deferral deadline and the deadline to invest eligible gains into a QOZ Fund by two years, until December 31, 2028.

2. Renewing eligibility for the cost basis step-up for capital gains invested in QOZ Funds, with modifications to the required holding period.

3. Implementing an early sunset for QOZ census tracts that no longer meet the eligibility criteria based on updated data, replacing them with new low-income communities.

4. Allowing QOZ Funds to invest in other QOZ Funds, facilitating collaboration and diversification of investments.

5. Reimposing and expanding QOZ reporting requirements to provide transparency about QOZ Funds and their projects.

6. Establishing a State and Community Dynamism Fund to support public and private investment in Opportunity Zones.

The Extension Act was a comprehensive proposal that garnered broad support from both Democrats and Republicans as a means to amend the Qualified Opportunity Zone (QOZ) Legislation. While it had strong potential to pass in 2022, it was considered too small to stand alone and required incorporation into a larger piece of legislation, which did not happen. Nonetheless, the structure of the Extension Act remains the favored approach for amending the QOZ Legislation, and it is expected to gain renewed attention as Congress addresses provisions of the Tax Cuts & Jobs Act set to expire in 2025.

RCX believes the sources relied upon herein are reliable, but takes no responsibility for its accuracy.