#JimmyTalk: How to find a Qualified Opportunity Zone fund

In October we explored in this column the investment potential of federal government-authorized Opportunity Zones. There are Opportunity Zones locally in these counties:  Knox, Anderson, Blount, Loudon, Roane, Sevier and Union.

The Investing in Opportunity Act, part of the Tax Cuts and Jobs Act of 2017, set up Opportunity Zones to provide a capital gains tax benefit for investments into areas identified as economically distressed. State governors made nominations to the federal government, which then announced respective states’ zones. There are some 8,700 Opportunity Zones across the country and U.S. possessions.

If an investor achieves a capital gain through the sale of a capital gain-generating investment, the gain can be invested in a Qualified Opportunity Zone (QOZ) fund.

If the QOZ investment grows and is held for at least five years, the investor gets a 10% capital gain discount on the investment. At seven years it’s a 15% discount. Holding the investment for 10 years, and depending on the investment’s returns, the investor potentially can get back in full the initial investment and any gains are tax-free.

To participate, investors pool in a QOZ fund money from capital gains, which is then invested in eligible needs. On Tennessee’s state government website, potential investments are identified as:

  • Business development and brownfield redevelopment opportunities
  • Retail, commercial and tourism development opportunities
  • Community and rural development initiatives
  • Low-income housing development opportunities
  • Proximity to entrepreneur centers, technology transfer offices, and colleges and universities

If the investment ultimately shows loss rather than growth, investors can take a capital loss.

Knoxville is seeing impact. On May 30, it was announced that a QOZ fund would be constructing a boutique housing community as part of mixed-use development of the Kerns Bakery property. The City of Knoxville website cites Opportunity Zone funds as being used to redevelop the former state Supreme Court site downtown. A map and more information on Knoxville and Knox County Opportunity Zones is available from the Knoxville Chamber.

The National Council of State House Agencies is a good source to locate qualified Opportunity Zone funds. The NCSHA’s Opportunity Zone Fund Directory, last updated on Oct. 2, contains the funds’ names, size, and geographic and investment focus: https://www.ncsha.org/resource/opportunity-zone-fund-directory/.

For someone interested in starting their own QOZ fund, partnerships or corporations can form QOZ funds by filing IRS Form 8996, along with their federal tax return. A requirement: at least 90% of fund assets in Opportunity Zone properties. An LLC that for tax purposes operates either as a partnership or a corporation can organize as a QOZ fund.

As one might expect, a QOZ fund isn’t only a matter of filling out the proper IRS form and finding an investment target within an Opportunity Zone. There are fair market value, gross income, property rules, timing of investments, and a series of other factors to be considered.

Opportunity Zones are an opportunity, but they’re also about taxes, a subject in which government takes great interest. The rules are significant. Consult with an investment adviser, tax attorney or accounting firm with a deep well of experience in this sector.

It could be opportunity knocking.


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This article first appeared in KnoxNews.

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