By Anayat Durrani

Qualified Opportunity Zone funds can provide tax advantages. By investing capital gains into a qualified opportunity fund, investors can defer and reduce capital gains, diversify their portfolio and jumpstart economic growth and business activity in distressed communities. Investors looking to maximize their return on investment may reap some extra benefits with year-end investments in Opportunity Zones.

“Investors will find the biggest impact with fund managers who reflect your values and who also have demonstrated strong track records in their fields,” says Jonathan Tower, founder and managing partner of Arctaris.

Tower says there’s a wide array of OZ fund options available such as “private equity funds versus real estate, funds with portfolio diversification versus single-deal funds, experienced fund managers versus first-time managers, and Impact OZ funds that improve communities versus those that solely aim to make a buck.” He says it’s wise not to compromise on investment experience or values, “just to save on taxes, because you can find exactly what you want.”

Investing by year-end can allow investors to defer, reduce and eliminate capital gains

“There are meaningful benefits to making your OZ investments in 2021 instead of procrastinating to 2022. The commonly cited benefit is the 10% cost basis step-up, which ends on December 31, 2021,” says Tower.

Investors can defer paying taxes on their original capital gain until the end of tax year 2026. Investing by the close of 2021 means investors can hold their investment for five years and qualify for a 10% reduction in the original deferred capital gain amount due in 2027. Holding the investment for at least 10 years means no capital gains will be owed past what was paid in 2027.

Jill Homan, president of Javelin 19, a real estate investment, development, and advisory firm, says they are recommending to investors who have active capital gains and would like to utilize the Opportunity Zone tax incentive to invest by the end of the year. She says these investors need to invest into a Qualified Opportunity Fund or create their own QOF to get the 10% step up in basis benefit.

“However, we recommend that investors really consider the Qualified Opportunity Fund before investing. The main benefit with OZ investing is the tax free appreciation for a 10 year hold. Thus, investors want to make sure their investment is appreciating over time,” says Homan.

Bonus depreciation is additional benefit to year-end Opportunity Zone investments

Tower says for some investors, there’s an even bigger incentive to invest in 2021 and that is 100% Bonus Depreciation. He says it is an additional tax deduction above and beyond the long-term capital gains benefits that some investors may use to reduce their taxes on ordinary income.

“To use the bonus depreciation benefit, investors should consider completing their investments in 2021 so that this capital is deployed into qualifying projects -- usually private equity operating business or infrastructure assets -- that will be completed and put into service for tax purposes before December 31, 2022, when bonus depreciation starts phasing out,” says Tower.

Tower says it’s important to consult with a tax advisor since every individual tax situation is unique. Homan says investors considering using the OZ tax incentive should speak with their attorneys and accountants now to verify the character of their capital gain and its timing.

“Also, they should vet opportunities to ensure they are providing for an adequate risk-return for the investors. Lastly, investors should consider the timing of their desired QOF to ensure the fund is open and they can invest in time/before the end of the year,” says Homan.

Homan says if investors miss the end of the year deadline, they can still utilize the OZ tax incentive.

“They just miss out on the 10% step-up in basis. They still receive the two benefits of deferral until December 31, 2026 and tax free appreciation on a 10 year hold,” says Homan.


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