Qualified Opportunity Zones: QOZ Funds & Investments

You may have come across the acronym QOZ maybe in the press or from the investment world. The term has been in existence since 2017, having been established by the TCJA (Tax Cuts and Jobs Act). QOZ (Qualified Opportunity Zones) are zones that have been identified and ratified for investment. If you invest in a QOZ, you are eligible for tax incentives from the Federal Government. 

How are QOZs chosen, and how do you invest?

There are currently over 8,700 QOZs identified and certified in the US (50 states and five territories). QOZs are assigned census tracts that have been picked by state governors and approved by the US Department of Treasury. If you are searching for a real estate investment opportunity, QOZs can be considered viable ventures.

QOZs are generally in low-income marginalized communities, as defined by the 2010 census. To qualify for QOZ status, a community must meet one of the following criteria;

  • The community must have a poverty rate of higher than 20%. 
  • If the community is in a metropolitan area, it must have a median household income of below 80% of the median metropolitan household income (or the median statewide household income, whichever is greater)
  • If the low–income community is not in a metropolitan, its median household income must be less than 80% of the median statewide income.

This program aims to encourage investors to commit long-term capital in marginalized communities across the US by giving you investor-specific tax incentives. This investment is made through special purpose vehicles known as QOF (Qualified Opportunity Funds)

What are the types of QOFs?

There are currently over 600 QOFs managing over 10 billion dollars in various QOZs. You have to be extra careful when selecting the right QOF for you since it’s a recently developed investment tool. 

A QOF is a fund organized by either a corporation or partnership that holds at least 90% of its assets in QOZ property. An investment fund is only recognized as a QOF after filing IRS Form 8996 with its federal tax return.   

QOF can invest in new or existing businesses in the qualified opportunity zone. These investments can be in commercial real estate, infrastructure, and even startups. However, QOFs have restrictions on the kind of businesses they can invest in. These restrictions apply to some businesses like liquor stores, sun tanning businesses, gambling establishments, etc. 

QOFs can be either identified fund or semi-blind funds:

  • Identified funds are targeted at already ongoing projects or those starting imminently. You can even visit the site to monitor the project. Thus, from the outset, you know which projects are being financed and developed. 
  • Semi blind funds are focused on first raising the capital then subsequently identifying QOZ projects to invest in. Therefore, they are less transparent than identified funds. On the plus side, the ready availability of funds may lead to quick acquisition and closing.

As you select which QOF to use for your real estate investment opportunity, make sure that the fund managers have lots of experience in real estate, particularly in the state where the QOZs are located. You must also research widely on the communities’ response to the QOF investment, as the lack of goodwill has brought many projects to a grinding halt.

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