Frequently Asked Questions
Different communities designated as Opportunity Zones require specialized strategies from developers. For example, more populated areas may tend to focus on housing, with additional emphasis on workforce development in an effort to ameliorate the growing affordable housing shortage across the country. Along with evaluating strategic considerations, investors and developers may wish to choose locations based on prior experience or on existing relationships. There is no shortage of options, as each state’s governor was able to designate up to 25% of a state’s low-income areas as opportunity zones. However, it is important to promptly identify desired investment locations and develop the associated investment objectives.
Investors should consider joint ventures, especially when investing in markets with which they are unfamiliar. Such ventures would grant them access to local resources and knowledge by partnering with companies experienced in developing projects within that specific region.
In order to achieve the deferral of capital gain taxes, the capital gain must be properly invested with an Opportunity Fund within six months of the sale which generated the gain. In light of this restriction, it may make sense to evaluate whether to postpone the sale of such capital assets in order to allow more time for finding the right investment.
Another critical consideration is the change in maximum possible benefit depending on the length of time that investors maintain the investment in a qualified Opportunity Fund. If the investment is held for five years, ten percent of the original gain is eliminated. If held for seven years or longer, an additional five percent is eliminated. Thus, investing quickly could yield greater returns since the reduced tax on the original gain cannot be deferred past December 31, 2026 or the date that the investment in the qualified Opportunity Fund is liquidated, whichever is sooner. The closer that investors get to 2026, the more likely that they will lose out on the reductions.
Investors should recognize that because of the higher after-tax return on investment, there is a greater ability to deploy capital more affordably. This allows for diversification, but even more importantly, provides for an ROI in assets that historically produce lower pre-tax returns. Investors should review their portfolios and identify opportunity zone fund investments that align with their investment goals.
Investors should develop a flexible approach in connection with their policies and the related documentation (e.g., documents organizing qualified Opportunity Zone investments through new qualified Opportunity Funds), given the possibility of legislative changes in connection with these new investment vehicles. Remember, even the current regulations for qualified Opportunity Zone investments are merely in proposed form, so protecting your anticipated tax benefits will be critical, and flexible, well-crafted documents and internal policies will maximize that protection.
There are significant uncertainties with the currently proposed regulations of qualified Opportunity Zone investments, including those related to timing, asset classifications, and improvement issues. It is essential to work with an experienced tax advisory firm which can assist with accounting for and mitigating such uncertainties, including doing so through the use of adaptable documentation, and which can consult on all aspects of your qualified opportunity zone investment.