What is an Opportunity Zone? Created in 2017, as part of the Tax Cuts and Jobs Act, this bill helps stimulate economic growth in distressed communities across the country. To achieve this, Congress passed special tax incentives to encourage investors to recognize a capital gain from the sale of an asset which they otherwise may not have sold due to the tax liability.
To capture these tax benefits, investors must contribute a portion, or all of their capital gains, to a Qualified Opportunity Zone Fund (QOF). The QOF then invests in one or more of over 8700 Qualified Opportunity Zones around the United States. The investment comes in the form of real estate development, as well as investing directly into a Qualified Opportunity Zone Business (QOZB).
The various opportunity zones around the country are hand-selected by state governors based on 2010 Median Household Income data. These designations are approved by the Secretary of the US Treasury, via the Internal Revenue Service (IRS).
You should research these investment opportunities because:
- It’s the first time in history that investors who have sold a stock, business, real estate, or other capital assets can then use their gains as an investment vehicle to defer & reduce their current tax liability; while potentially eliminating capital gains tax in the future growth of their QOF investment. Previously, similar tax benefits were only available to real estate investors via a 1031 Exchange
- Opportunity fund investments help distressed communities to rebuild anew, driving community job growth and helping to stimulate local economies
Important note: You can defer tax payments on your previous investments’ capital gains if those gains are then invested into an opportunity fund within 180 days after the sale. These taxes can be deferred to either the day the QOF investment is sold or exchanged; or until 12/31/2026, assuming you keep your gains in the fund during its full cycle.
Opportunity Zone Program Benefits to Investors
When it comes to investing in a QOZ, there are numerous beneficial tax advantages you can enjoy, depending on the amount of time you keep your capital gains vested within the investment. They include tax deferrals, a step-up in basis opportunities and the elimination of capital tax gains.
Tax deferral
You defer taxes from the original sale through December 31, 2026, or when the investment in the Opportunity Zone Fund is sold, whichever comes earlier.
Step-up in basis
If an investment in a QOF is made before the end of 2021, and held for at least five years, investors are then eligible for a step-up in basis of 10%. This means investors only pay tax on 90% of deferred gains when filing their 2026 tax returns.
Eliminating the capital gains tax
Additionally, if you hold the Opportunity Zone Fund investment for at least 10 years, any capital gain appreciation earned from the Opportunity Zone Fund investment is not taxed upon disposition. This is the most significant tax benefit provided by Opportunity Zones.
To learn more about the benefits of investing your capital gains within an opportunity zone with examples included, please read Investing in an Opportunity Zone – The Power of Using Capital gains to Defer Tax.
Opportunity Zone Fund Requirements
By law, opportunity funds are required to make substantial improvements to their properties that are equal to or higher than the original value paid by the fund. Additionally, these improvements need to be implemented within 30-months of purchase.
Example: The fund you join purchases a property for $500,000. This begins the 30-month timeline to make at least $500,000 in improvements to it.
Check out Why now is a Good Time to Reinvest in Real Estate to learn more about the benefits and potential of investing in properties.
The 50-Percent-of-Gross-Income-Test
For a business to qualify to be a part of a QOF, they need to meet a certain set of requirements. According to the IRS, “Each taxable year, a QOZ business must earn at least 50 percent of its gross income from business activities within a QOZ. “
The regulations provide three safe harbors that a business may use to meet this test. Businesses only need to meet one requirement of the following three “safe harbors” to be included in a QOZ:
- At least half of the aggregate hours of services received by the business were performed in a QOZ
- At least half of the aggregate amounts that the business paid for services were for services performed in a QOZ
- Whether necessary tangible property and necessary business functions were located in a QOZ.
The types of businesses not approved in any Opportunity Zone Fund
Certain types of properties are ineligible to be in any of these funds, those include:
- Liquor stores
- Country clubs
- Golf courses
- Tanning salons
- Gambling facilities
- Massage parlors
General Risk Factors of Investing in Opportunity Zones
There are numerous risk factors when it comes to investing in an opportunity zone because these funds are speculative, are not easily converted to cash and like any investment, there comes a high degree of risk, including the loss of the entire investment.
Some other risk factors to consider should include:
- Interest rate changes
- Tax rate changes
- Societal conditions affecting specific market locations
- Financing options availability
- Changes to rules and regulations by the IRS and Treasury Department that may affect the impact of your investments in unforeseen ways
Investor Considerations
The information contained herein is general in nature and is not intended, and should not be construed, as accounting, financial, investment, legal, or tax advice, or opinion, in each instance provided by Caliber or any of its affiliates, agents, or representatives.
The reader is cautioned that this material may not be applicable to, or suitable for, the reader’s specific circumstances, desires, needs, and requires consideration of all applicable facts and circumstances. The reader understands and acknowledges that, prior to taking any action relating to this material, the reader:
(i) has been encouraged to rely upon the advice of the reader’s accounting, financial, investment, legal, and tax advisers with respect to the accounting, financial, investment, legal, tax, and other considerations relating to this material
(ii) is not relying upon Caliber or any of its affiliates, agents, employees, managers, members, or representatives for accounting, financial, investment, legal, tax, or business advice, and
(iii) has sought independent accounting, financial, investment, legal, tax, and business advice relating to this material. Caliber, and each of its affiliates, agents, employees, managers, members, and representatives assumes no obligation to inform the reader of any change in the law or other factors that could affect the information contained herein.
Investor considerations continued
This overview is for information purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any interests in the Caliber Tax Advantaged Opportunity Zone Fund, LP (CTAF) or any other securities. Any such offer will be made only pursuant to CTAF’s Private Placement Memorandum, as amended and restated, and other offering documents.
This overview may include or be based in part on projections, valuations, estimates and other financial data supplied by third parties, which have not been verified by CaliberCos, Inc., its affiliates or CTAF. This information should not be relied upon for the purpose of investing in CTAF or for any other purpose.
Any information regarding projected or estimated investment returns are estimates only and should not be considered indicative of the actual results that may be realized or predictive of the performance of CTAF or any underlying assets in which the Fund invests. Past investment results of any underlying managers should not be viewed as indicative of future performance of CTAF.
Prior to investing, investors are strongly urged to review carefully the Private Placement Memorandum (including the risk factors described therein), the Limited Partnership Agreement of CTAF and the subscription documents, to ask such questions of the general partner as they deem appropriate, and to discuss any prospective investment in the Fund with their legal and tax advisers in order to make an independent determination of the suitability and consequences of an investment.
Investment in CTAF is suitable only for sophisticated investors for whom an investment in the CTAF does not constitute a complete investment program and who fully understand, and are willing to assume, the risks involved in an investment in CTAF.
