A new investment vehicle was created as part of the Tax Cuts and Jobs Act of 2017. This vehicle is called an Opportunity Fund. The purpose of the fund is to encourage investment in targeted communities as designated by state and federal governments. These communities are generally low-income and in need of economic development.
According to the IRS, multiple types of taxpayers may participate in these funds. Individuals, Corporations (C and S), partnerships, and LLCs are some of the entities that may invest in these funds.
Essentially, the funds allow capital gains taxes to be deferred until December 31, 2026.
In order for taxpayers to utilize this tax break, the gains must be reinvested in a qualified opportunity fund (QOF) within 180 days (six months) of realizing the gain.
A QOF is an entity formed explicitly for the purpose of investing in these zones and holds at least 90% of its assets in such property. The entity must self-certify each year by filing a Form 8996 with its tax return.
The gain is invested in a QOF and the tax is deferred until December 31, 2026 or the sale of the QOF, if earlier. There is no limit on the amount of gain that can be deferred.
If the deferred gain is recognized within five years of the gain, 100% will still be taxable. If held for at least five years, 90% of the gain will be taxable. If held at least seven years, 85% of the gain will be taxable. If held at least ten years, up to 100% would be tax free.