Opportunity Zone Fund Investments

Opportunity Zone Funds: FAQs

1. What are opportunity zones?

  • An Opportunity Zone is an area identified by the Department of Treasury as economically distressed. The intent of these zones are to encourage investment and development of these communities by giving preferential tax treatment to individuals with capital gain events. It is our belief that much of this investment is expected to come from those who have exited their companies and have some excess cash that they can roll into a new business venture in an extremely tax efficient manner.

  • The concept is very similar to a 1031 exchange. In a 1031 exchange you may sell a commercial property or residential rental home, then identify a like kind property and invest some of those funds then the proceeds from that sale in another residential real estate property then you don't have to immediately pay tax on the sale of that property. The appreciation of the asset then can grow tax deferred. In this scenario, you’re can buy more of an asset than you would have been able to with after tax money. This whole opportunity zone piece of the tax reform is a very similar principle, but it is specifically related to operating companies.

2. Who can take advantage of opportunity zones?

  • My belief is that initially, the Entrepreneurs and Business Owners that are in the position to Exit or Sell their companies are the ideal candidates for this type of investment

3. Why should they be taken advantage of?

  • Opportunity fund investing should be taken advantage of because they are intended to spark economic development and provide investors with a tax advantaged investment

  • For example: Let's say you sell a technology company for $20 million and then you invest $15 million in an opportunity zone in 2018. The tax on the portion of the proceeds that are reinvested in an OZ is deferred. After 5 years of having these proceeds in an opportunity zone fund, of that original $15 million dollars that you invested in the qualified opportunity zones the IRS is going to exclude 10% of the allocated gain from that original sale. At year 7 another 5% gets excluded. Then, in the year 2026 you will have a taxable event on the non-excluded gain. If you still have the investment after 10 years, the appreciation of that investment is excluded entirely from gain.

  • So, if we invested that $15 million dollars here in 2018, hold it for 10 years and now it has appreciated to $25 million, then this $10 million of appreciation of growth is potentially excluded from gain.

4. How and what is the best form of getting involved with them?

  • The code states that you have to invest in a fund in these zones. These funds are being developed right now and will eventually become available to people. Over the next few months, the Treasury Department and the Internal Revenue Service will be providing further details, including additional legal guidance, on this new incentive.
  • The Oculus OZ Fund is the first Atlanta Opportunity Zone Fund Investment we've seen that is pioneering this investment category. Fusion CPA is helping to establish the accounting and tax compliance for this "first to market" fund.

Resources:

Department of the Treasury overview

IRS Revenue Procedure

Nationwide map of Opportunity zones : To view all designated QOZs including Atlanta, Georgia opportunity zones, click on the “Layers” tab on the menu on the right hand side of the screen. Select “Opportunity Zone Tract” and unselect “2011-2015 LIC Census Tract,” and zoom in to a specific area on the map. Designated QOZs will appear in blue.

Opportunity Zone Funds - Tax Planning & Investing I Fusion CPA

Opportunity Zone Investing is likely one of the most economically impactful pieces of the 2018 Tax Reform Bill for entrepreneurs and business owners.