Investing In Qualified Opportunity Funds

Qualified Opportunity Funds and What You Need To Know As An Investor!

With the all the recent attention on the newly created Opportunity Zone Program introduced in the Tax Cut and Jobs Act, there is already confusion as to the ins and outs of Qualified Opportunity Funds. We aim to solve that problem by writing this post Investing In Qualified Opportunity Funds.

Breaking Down Investing In Qualified Opportunity Funds:

I. What is a Qualified Opportunity Fund?

A Qualified Opportunity Fund per 26 U.S. Code IRC 1400Z(2) is as follows: The term qualified opportunity fund means any investment vehicle which is organized as a corporation or a partnership for the purpose of investing in qualified opportunity zone property. Further more it holds at least 90 percent of its assets in qualified opportunity zone property. As an investor you are investing in either:

1) A newly formed C-Corp that issues stock to you based on your investment and should follow SEC 506 Reg D rules. Additionally, you should be able to review a formal private placement memorandum. This is the Sikari Luxe Model*.

2) A LLC that issues units of ownership. As an investor you should be able to review a formal operating agreement. This is the Virtura Partners Model*.

*As of time of writing this the only two Qualified Opportunity Funds open to investors are the Sikari Luxe Funds and the Virtura Partners Fund.

II. What is Qualified Opportunity Zone Property?

1) Opportunity Zone Stock: The term Qualified Opportunity Zone Stock means any stock in a domestic corporation if (I)such stock is acquired by the qualified opportunity fund after, at its original issue (directly or through an underwriter) from the corporation solely in exchange for cash, (II)as of the time such stock was issued, such corporation was a qualified opportunity zone business (or, in the case of a new corporation, such corporation was being organized for purposes of being a qualified opportunity zone business), and (III)during substantially all of the qualified opportunity funds holding period for such stock, such corporation qualified as a qualified opportunity zone business.
This means that a qualified opportunity fund can invest into the stock of a corporation so long as the corporation being investing into is a qualified opportunity zone business.

2) Qualified Opportunity Zone Partnership Interest: The term qualified opportunity zone partnership interest means any capital or profits interest in a domestic partnership if:(i) such interest is acquired by the qualified opportunity fund after December 31, 2017, from the partnership solely in exchange for cash, (ii) as of the time such interest was acquired, such partnership was a qualified opportunity zone business (or, in the case of a new partnership, such partnership was being organized for purposes of being a qualified opportunity zone business), and (iii) during substantially all of the qualified opportunity fund holding period for such interest, such partnership qualified as a qualified opportunity zone business.

This means that a qualified opportunity fund can invest directly into a LLC of another business so long as the LLC being invested into by the fund is a qualified opportunity zone business.

3) Qualified Opportunity Zone Business Property: The term qualified opportunity zone business means tangible property used in a trade or business of the qualified opportunity fund if: (i) such property was acquired by the qualified opportunity fund by purchase (as defined in section 179(d)(2)) after December 31, 2017, (ii) the original use of such property in the qualified opportunity zone commences with the qualified opportunity fund or the qualified opportunity fund substantially improves the property, and (iii) during substantially all of the qualified opportunity funds holding period for such property, substantially all of the use of such property was in a qualified opportunity zone.

As an investor it is important to know what type of property the opportunity fund will be investing into. A fund can be diversified by splitting the risk between multiple zone property investment types. So a fund can invest in all three to generate returns for the fund.

III. What is Qualified Opportunity Zone Business?

The term qualified opportunity zone business means a trade or business (i) in which substantially all of the tangible property owned or leased by the business is qualified opportunity zone business property.

IV. Qualified Opportunity Fund Investor Benefits

Investing In Qualified Opportunity Funds gives you several benefits.

You get to claim your investment into a qualified opportunity as a tax deferment that year up to the amount of gain realized and invested. As an investor you can invest more than your gain realized into an opportunity fund however you will not see the tax deferment benefits for anything invested over the amount of gain realized.

At 5 years 1 day you get a 10% setup in basis on the initial gains invested.

At 7 years 1 days you get another 5% step in basis in addition to the 10% step up for a total of 15% step up in basis.

Special Rules for investments held longer than 10 years 1 day. In the case of any investment held by the taxpayer for at least 10 years and with respect to which the taxpayer makes an election under this clause, the basis of such property shall be equal to the fair market value of such investment on the date that the investment is sold or exchanged.

For investors this means your have deferred your original investment from taxes and the gains are tax free. Assuming of course the investment has gained value in the time frame of 10 years.

V. Investing In Qualified Opportunity Funds Common Questions.

As an investor looking to roll your capital gains into a fund (that’s what it is officially called an opportunity fund roll over) capital gains realized is not limited to sale of property. For the sake of Qualified Opportunity Funds, capital gains can be from the sale of cryptocurrency, stocks, property, etc. Anything that created a capital gain situation.

Are there minimums to invest? The minimum investment is limited to your gain situation. Important to note that each Qualified Opportunity Fund may have it’s own guidelines on minimum investments.

Are there maximums? No there is no maximum to investments. Any investment made in excess of your capital gains will be excluded from the capital gains deferment and that % of investment made in excess of the capital gain could create a potential tax situation for you based on potential returns on the funds.

How long do I have to decide to invest? You have 180 days from date of gain realized to decide to roll into an opportunity fund or loose the ability for that specific gain realized. Each gain realized to you and investor restarts the 180 day window.

What about 1031 Exchanges? If I have a 1031 Exchange can I roll out of a 1031 exchange into a qualified opportunity fund? The answer is yes. If you roll out of a 1031 exchange and into an opportunity, you may be faced with depreciation recapture. If you claimed depreciation (as most do) that recapture would be taxed as ordinary income.

Am I responsible to roll the principle and capital gain into a fund? No! Just the capital gain. Opportunity Funds provide an outlet to claim the tax deferment on the capital gains without locking up your principle.

Final Considerations For Qualified Opportunity Funds

Qualified Opportunity Funds could be an excellent investment vehicle that should be carefully considered and reviewed. They provide an immediate tax deferment with the ability to gain tax free in the future. However, they may not be everyone. There are various risks involved as with any investment vehicle. With that said, if you are interested in Qualified Opportunity Funds, Sikari Luxe has open funds available for investment. If have you realized a gain this year you may still have time to take advantage so long as you are within your 180 day window.

Investing In Qualified Opportunity Funds

Opportunity Funds Open To Investors

Minimum Investment is $50,000

Just answer a few questions and a team member will call you regarding investing into our Qualified Opportunity Fund.