Investing in Opportunity Zones is becoming more and more popular every day due to the eligible tax incentives offered by the Opportunity Zone program. For investors diving headfirst into deals, it’s imperative to be knowledgable of the program’s rules to avoid making mistakes in your deals. In this article, we will share some of the mistakes that have already been made when investing in Opportunity Zones so you don’t make the same mistakes!
Make Sure You Are Investing in a Qualified Opportunity Zone
One of the main rules of the program is that you have to invest in a Qualified Opportunity Zone (QOZ). These QOZs are economically-distressed areas designated by the government that provide certain tax benefits to investors in an effort to spur economic development and job creation. Because of this, it is crucial that you make sure you are investing in a Qualified Opportunity Zone and are performing due diligence to ensure that you are investing in a Qualified Opportunity Zone. If it so happens that you did invest in a non-qualified opportunity zone, you will not be eligible to receive the tax incentives offered by the Opportunity Zone program.
Due to the newness of the Opportunity Zone program, there have been numerous errors on the maps that show the Qualified Opportunity Zones depending on which website you visit. Because of this, it is vital that you are checking your maps source to ensure that it is credible and accurate.
To view a map of the designated Qualified Opportunity Zones that have been certified by the Secretary of the Treasury, click here.
To view a list of designated Qualified Opportunity Zones, click here. It lists the population census tracts that the Secretary of the Treasury designated as QOZs.
Follow the Time Frame
Another rule of the proposed regulations states that an investor must reinvest capital gains into a Qualified Opportunity Fund within 180 days in order to qualify. For most taxpayers, the capital gain is realized on the date the capital asset is sold. The regulations also confirmed that a taxpayer can sell a QOF investment and re-invest within 180 days without recognizing the gain. This allows an investor to exit one QOF and invest in another if it is reinvested within the 180-day time frame. Failure to abide by this time frame will make your investment ineligible for the tax incentives offered by the Opportunity Zone Program.
One of the most significant issues for investors who want to invest in QOZs is that many of the guidelines for investing in QOZ funds are unclear, especially when it comes to multi-asset funds. The current regulations make it difficult to invest in businesses located in designated areas, and they make it difficult to invest in multi-asset funds. These and other issues have been brought to the attention of the U.S. Treasury, through public comment letters and at an Internal Revenue Service hearing that was held in February.
The Economic Innovation Group (EIG), which developed the opportunity zone concept, gave a testimony at the IRS hearing that focused on this issue emphasizing that guidance from the Treasury and IRS is urgently needed. This request was echoed in many speakers’ testimonies, as well. In EIG’s testimony, they stated that,
“The IRS needs to publish regulations that support the formation of multi-asset Opportunity Funds, by allowing timing flexibility for funds to raise and deploy capital, and ensuring the intended 10-year tax benefit is preserved and available to investors. Multi-asset funds are imperative so that investors can spread risk across multiple zones, investments, and asset classes, and ultimately reach the Opportunity Zones where returns are less certain. Investing in operating businesses, in particular, is only practically possible at scale via a multi-asset fund.”
So, for investors that are looking to invest in multi-asset funds, we recommend waiting until the current regulations have been clarified and finalized by the Treasury and IRS, which is expected to happen over the next year or two. By doing so, you reduce the risk of your capital gain investment from being potentially disqualified from receiving the tax incentives offered by the Opportunity Zone program.
Even though there is risk involved and room to make errors when investing in Qualified Opportunity Zones, it’s worth noting that the advantages of the capital gains tax incentives and the ability to transform thousands of census tracts is substantial and should be taken into consideration. CrowdEngine offers an easy way for you to start utilizing crowdfunding portals as a way to group investors within a single fund to participate in the opportunity zones. Issuers that are creating an Opportunity Fund can use our white label or private label solution to create offerings such as a Reg D 506(c) for accredited investors or an A+ raise for both accredited and non-accredited investors. With our white label or private label solutions, you can manage investors, track investments, track returns, and even disperse earnings. Contact us to learn more!
If you still have questions about Qualified Opportunity Zones, we have answers to some of the most frequently asked questions about QOZs here!
Disclaimer: This information is provided to our clients and other friends for educational purposes only. CrowdEngine is not guaranteeing any information as reliable or accurate, and that it’s subject to change at any time. It should not be construed or relied upon as legal advice. Please contact your accountant and or lawyer with respect to any of the matters discussed here.
This post was written by Lanli Pham on April 8, 2019
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