How to Invest

The Opportunity Zone (OZ) program is a product of the Tax Cuts and Jobs Act (TCJA), enacted in December of 2017. The OZ program follows strict guidelines provided in 26 U.S. Code 1400Z-1 and 1400Z-2 and is regulated by the U.S. Department of the Treasury and the Internal Revenue Service.

In order to access the benefits of the OZ program, investors must follow the below steps. Below is a detailed overview on how to invest through the OZ program and what types of investments qualify.

Steps to Invest

1.) SELL AN ASSET

An investor must sell an asset to realize a capital gain

2.) ENROLL GAINS INTO A QOF

Investor then enrolls all (or a portion) of their capital gain into a Qualified Opportunity Fund (QOF) within 180 days of sale

3.) QOF INVESTS IN OPPORTUNITY ZONES

The QOF invests in real estate or business investments that comply with the OZ program

Qualified Investments Include

REAL ESTATE

Any building or vacant site located within an Opportunity Zone qualifies as a Qualified Opportunity Zone (QOZ) investment. Two main criteria are considered in assessing a QOZ real estate investment. 

The original use of the building in the QOZ is not considered to have commenced with the QOF.

The requirement that the original use of tangible property in the QOZ commence with a QOF is not applicable to the land on which the building is located.

Substantial Improvement requires the QOF to match the basis of the original value of the building within 31 months of acquisition. Rulings indicate that land is excluded from the Substantial Improvement test. 

Example 1 – QOF Owns 100% of Asset: A QOF acquires real estate for $1M and the land value is worth $400k, then the QOF is required to invest an additional $600k within 31 months of acquisition to meet the “Substantial Improvement” test. 

Example 2 – QOF Owns Portion of Asset: A QOF acquires an interest in a real estate project from Entity Z. The QOF still must meet the “Substantial Improvement” test but may not be 100% responsible for matching the basis of the building value. If Entity Z already has plans for improving the building, which would match the basis of building, then this would satisfy the “Substantial Improvement” test making it a viable QOZ investment. 

BUSINESS

Businesses  located within a Qualified Opportunity Zone (QOZ) may qualify if they meet certain criteria. Most notably, the majority of a business' gross income must be generated from within an Opportunity Zone.

  • At least 50% of the services performed (based on hours) for such business by its employees and independent contractors (and employees of independent contractors) are performed within the qualified OZ.
  • At least 50% of the services performed for the business by its employees and independent contractors (and employees of independent contractors) are performed in the qualified OZ, based on amounts paid for the services performed.
  • The tangible property of the business that is in a qualified OZ and the management or operational functions performed for the business in the qualified OZ are each necessary to generate 50% of the gross income of the trade or business.

Taxpayers not meeting any of the three safe harbor tests may meet the 50% requirement based on a facts and circumstances test if, based on all the facts and circumstances, at least 50% of the gross income of a trade or business is derived from the active conduct of a trade or business in the qualified OZ.

At least 70% of a partnership or corporation’s tangible property owned or leased must be qualified opportunity zone business property. 

A substantial portion of the intangible property of an opportunity zone business is used in the active conduct of a trade or business in the QOZ. The term substantial portion in this section means at least 40 percent.

The guidance provides a safe harbor for OZ businesses that acquire, construct, or rehabilitate tangible business property, which includes both real property and other tangible property used in a business operating in an opportunity zone. The safe harbor allows a reasonable amount of working capital to be held for a period of up to 31 months, if three requirements are met:

  • Intended uses are designated in writing.
  • There is a reasonable written schedule.
  • The working capital is used in a manner substantially consistent with the designated uses and written schedule.

Preexisting entities can qualify as QOZ businesses as long as they meet the necessary requirements. 

OZI News

Join our newsletter and receive updates on the OZ program along with new investment listings