Opportunity Funds are investment vehicles that allow investors to support economic development in underserved communities while potentially receiving tax benefits. These funds were created as part of the opportunity zone program, introduced as part of the Tax Cuts and Jobs Act of 2017.
By investing in an opportunity fund, investors can qualify for tax benefits while supporting real estate development, infrastructure projects, or operating businesses in designated opportunity zones. In this way, opportunity funds allow investors to align their investment objectives with social impact goals. This article will give an overview of how an opportunity fund investment works.
Identify an Opportunity Fund
The first step to investing in an opportunity fund is identifying a fund that aligns with a person’s investment goals. Opportunity funds can be established by various entities, such as investment firms, real estate development groups, or community organizations. An individual can search online or consult a financial advisor for an opportunity fund.
When evaluating an opportunity fund, some factors should be considered, including the fund’s investment strategy, track record, and management team. An individual should also consider the specific investments the fund is making in opportunity zones and the potential risks and rewards associated with those investments.
Invest Capital Gains
Investing for capital gains is a strategy that involves purchasing assets, such as stocks or real estate, intending to profit from their value appreciation over time. The goal is to sell the asset at a higher price than what was paid, resulting in a capital gain.
Capital gains can be categorized as either short or long term based on the period of time the asset was held prior to sale. Short-term capital gains and ordinary income are taxed at a similar rate, while long-term capital gains tax rates are lower. This makes long-term capital gains a lucrative investment strategy for many individuals and organizations.
One way to invest in capital gains is by purchasing stocks or mutual funds. Investors can buy stocks in companies they believe will experience significant growth in the future, increasing the stock’s value. Mutual funds, which are collections of stocks and other investments, offer diversification and professional management to help investors maximize their capital gains.
Qualify for Tax Benefits
Investors can qualify for tax benefits if they hold their investment in the opportunity fund for at least five years. The longer the investment is held, the greater the tax benefit. Here are the potential tax benefits:
- If the investment is held for at least five years, the original capital gains tax liability is reduced by 10%.
If the investment is held for at least seven years, the original capital gains tax liability is reduced by an additional 5% (15% total).
Investments held for approximately ten years, an increase in the investment is excluded from tax.
Invest in Opportunity Zone Property
The opportunity fund invests the capital raised into opportunity zone property. This includes real estate development, infrastructure projects, or operating businesses in designated opportunity zones.
Exit Strategy
Opportunity funds have a ten-year investment horizon, after which they must liquidate their assets and distribute the proceeds to investors. Investors can then use those proceeds for other investments or take them as cash.
Investing in opportunity funds can be a way for individuals to align their investment goals with social impact goals while potentially receiving tax benefits. Investing in economically distressed communities can support real estate development, infrastructure projects, and operating businesses in opportunity zones.
While opportunity funds can provide tax benefits, it’s essential to understand the risks and potential benefits before investing and to consult a financial advisor or tax professional to assess the specific implications for individual circumstances. Opportunity funds can be a way to make a positive social impact while pursuing investment goals.
