Qualified opportunity funds (QOFs) allow investors to save money on taxes while simultaneously revitalizing disadvantaged communities. The rule governing these funds was established as part of the 2017 Tax Cuts and Jobs Act, and many investors have already jumped on board. There’s a time limit for how long the program will last, so anyone interested should find out about QOFs and how they work so that they can invest money ASAP.
What Are QOFs?
QOFs, also sometimes referred to as qualified opportunity zone funds are designed to drive real estate and business investments towards economically distressed areas called qualified opportunity zones (QOZs). The program creates incentives for investors by offering preferential tax treatment. Investors who put their money towards QOFs can reinvest realized capital gains into the funds and defer taxes for years, greatly reducing their tax burdens.
QOFs and QOZs
QUOs are designed to fund investments into QOZs, which are designated by state governments and certified by the U.S. Treasury Department. It’s only after a QOZ is approved the investors can begin investing in making improvements to properties and businesses through QOFs. The IRS maintains a list of all the QOZs for use by QOF administrators, which makes it easier to determine which types of property and business investments are covered under the Tax Cuts and Jobs Acts provision.
Help for Struggling Communities
The program was implemented with the intention of driving private investment money towards disadvantaged areas, and an initial impact assessment performed by the White House Council of Economic Advisors (CEA) found it to be effective. The CEA report indicated that, by the end of 2019, QOFs raised around $75 billion in private investment capital. This money could reduce poverty rates in QOZs by 11%, allowing at least a million people to move from poverty into self-sufficiency.
Benefits for Investors
There are plenty of American investors who would be happy to put their money into projects that help other people, but that’s not the only reason to invest in QOFs. The IRS also offers capital gains tax breaks. Investors who sell access and have large capital gains tax liability can roll their capital gains into a QOF, allowing them to defer and reduce their tax liability while also making a positive impact. Here’s how it works.
· Investors who fund QOFs defer paying taxes on their original capital gains until 2027.
The longer investors hold onto their QOZ investments, the greater their overall tax benefits.
Keeping the investment for more than five years effectively excludes investors from paying 10% of their realized capital gains.
Holding investments for ten years or longer allows investors to completely do away with their tax liabilities on capital gains appreciation beyond what they will pay in 2027.
QOFs provide a means of diversifying portfolios while helping others. QOFs can branch out into real estate investment, startup businesses, single-asset opportunities, or multi-asset funds spread across different classes and geographies. Investors typically have more visibility into the funds’ underlying investments than they would with traditional private equity, as well.
Start Investing
The first step investors must take is to do some research and find a QOF that shows promise. There are many funds to evaluate, so take the time to perform some due diligence. There are plenty of excellent options out there, so don’t be afraid to reach out to QOF directors with questions before choosing how to invest.