Is the cost of setting up and maintaining a QOF worth it or is it better to use an established fund? Why or why not?
A lot depends on scale. As with most businesses, scale and size often equals systemic, macro efficiencies known as economies of scale, and that tipping point exists when determining the "worth" of self-certifying or investing in a fund. Pros of self cert are control over your business and less fees. Con is you're on the hook for mistakes. On the flip side, a managed fund is likely compliant but will eat your gains in management fees.
Taxpayers have little choice and must self-certify. I suggest having a CPA or attorney who specializes in OZ funds to review it. I generally advise clients to only establish their own fund (vs. investing in a public fund) if they are deferring $1 million or more in gains.
I think the answer to this question would be specific to your facts and circumstances. If you have a gain and a project that you would like to invest in, self-certification is relatively straightforward and you might appreciate having control of the process. If you are looking for outside capital and are less concerned with control, you might be happy to use an established fund.
The pros are that there is less red tape. The con is that there is no outside disciple of reporting to an outside agency on a regular basis. Without this discipline, record-keeping may be sloppy and you could find yourself out of compliance if ever audited. As an investor, you should look for fund managers that will report the self-certifying report back to you or engage an independent CPA firm to audit the certification reports. The investor stands to lose more that the manager if the fund is de-certified and tax deferrals are clawed back.
There is no one simplified/right or wrong answer to that question. Each option involves setting up a QOF. Using an establish fund each has its drawbacks/advantages.
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