What is an Opportunity Zone (“O-Zone”)?
Introduced by the Tax Cut and Jobs Act of 2017, “Opportunity Zones” are low-income census tracts designated by state and federal government. Qualifying investments in these tracts may be eligible for preferential tax treatment if made through existing capital gains.
(Read Amina Fund’s Guide to Opportunity Zones.)
What is the purpose of Opportunity Zones?
Opportunity Zones are an economic development tool designed to incentivize investors to deploy their capital in emerging domestic markets where it can reduce the investors’ tax burden and grow his/her wealth while spurring economic development and job creation in distressed communities.
(See IRS FAQ for more information.)
What is a Qualified Opportunity Fund (“O-Fund”)?
An investment vehicle that invests a certain percentage of its assets in qualified Opportunity Zones (percentage threshold varies depending on how investments are structured, but generally 70%+). Investors that reinvest capital gains into an O-Fund can receive meaningful tax breaks including capital gains deferral, a substantial step up in tax basis, and tax abatement of all post-investment appreciation. Unlike the 1031 exchange program that has long been used to defer real estate-related taxable gains, eligible capital gains are not limited to real estate and can include gains from stocks and business or personal assets.
What types of investments can be made through an Opportunity Fund?
Investments are required to be equity investments in businesses or real estate within an Opportunity Zone. Most real estate investments will be subject to a “substantial improvement” requirement within 30 months of the purchase date. As a result, real estate O-Funds are expected to target development and rehabilitation projects. For example, an O-Fund could invest in a ground-up development of a mixed-use project that includes new retail and workforce housing.
Do I need to fund my investment with capital gains?
No. Investments into an O-Fund do not need to be made with capital gains. An O-Fund can pool eligible capital gains and “other capital.” However, only investments of qualifying capital gains are eligible for the O-Zone tax benefits.
Do I need to rollover my entire capital gain into the O-Fund?
No. The regulations also clarify that you can choose to rollover only a portion of the gain. Also, investors may divide a single gain to be invested into multiple O-Funds.
How do I know if my capital gains are “eligible”?
There are two key things to consider when determining eligibility of gains. First, only gains treated as a capital gain for U.S. federal income tax purposes is eligible. Ordinary income/gains such as depreciation recapture are not eligible.
Second, to defer a gain through an O-Fund investment, a taxpayer must generally invest in the O-Fund during the 180-day period beginning on the date of the sale or exchange giving rise to the gain. Where the gain is earned through a partnership or joint venture that does not choose to roll the gain into an O-Fund, an individual partner’s 180-day clock starts at the end of the tax year of that venture. (However, if you know the date of sale for gain earned in a venture, you can choose the earlier date if you need to invest earlier.)
How do I get my investment certified by the IRS?
O-Funds will self-certify using Form 8996 as a part of their tax return. Given the self-certification, there is no initial approval process by the IRS. Amina Fund, as the manager of the O-Fund, will need to file IRS Form 8996 every year to report compliance with the 90% asset test and other matters required by the IRS. When filing tax returns, investors will elect a deferral using Form 8949. All investors should consult their tax advisers regarding their individual reporting requirements.
(To learn more about certifying your investment, see the IRS’ Form 8949 Instructions for Eligible O-Zone Gains).
How is this reinvestment different to a 1031 exchange?
Unlike a 1031, the O-Zone rules allow you to reinvest any gain, not just gain from the sale of “like-kind” real estate assets. Moreover, O-Zone investment requires no intermediaries. You can hold your gain on your own and still benefit on any part of it you invest in an O-Fund within 180 days. Please reach out to us for a more comprehensive side-by-side between 1031s and Opportunity Zones.
If I have substantial capital gains due to sale of stock from my company’s recent IPO or a recent home sale, can I place this gain in an O-Fund even if the O-Fund is not ready to invest all the gains immediately? And, if I invested all my gain with Amina Fund today, how long would Amina Fund have to invest it?
The Proposed Regulations allow you to invest in an O-Fund immediately and certify your investment the very next time you file your U.S. federal tax returns–no need to wait until the fund is ready to invest all of your gains in a specific asset.
For the O-Fund to qualify prior to undertaking a development/investment, the manager must produce a written schedule that describes the planned expenditure of the cash (and other working capital).
This schedule must be produced prior to the end of the first 6 month period of the O-Fund (and in all events by December 31 of the O-Fund’s first year) and must generally contemplate the expenditure of the O-Fund assets within a 31-month period, thereby providing the flexibility to extend the window between gain recognition and capital deployment to as much as three years.
To avoid any risks associated with basing our O-Fund on a written plan that requires the future identification of assets, Amina Fund develops a written plan that corresponds to the assets identified for purchase. Our team is available to discuss a specific plan and funding strategy for you.
Do I still have to pay state tax on my qualifying capital gain?
There is still some debate here but most practitioners agree that investors in states that conform with the federal opportunity zones provisions may receive state tax incentives similar to those available at the federal level. Conversely, some practitioners believe investors residing in nonconforming states may be unable to defer and reduce state taxation on the initial gains invested in Opportunity Zones. Investors in non-conforming states may also be required to recognize gain for state tax purposes on their eventual sale of the opportunity fund investment.
Find a list of conforming and non-conforming states here. All investors should consult their tax advisers to confirm their local requirements.
By investing in Amina O-Zone Funds, will I own an interest in a specific building, business or assets?
Investors who invest with Amina O-Zone Funds are securing a membership unit in the Fund, not necessarily a single business and/or real estate asset. Amina Fund offers a unique limited-asset fund structure wherein a relatively small number of related assets are held within a single investment vehicle. We believe this structure is optimal as the IRS continues to contemplate regulations related to exits and reinvestment.
If I invest in Amina’s limited-asset O-Zone Funds, can I achieve diversification, or will I be choosing one asset?
Amina Fund’s approach is intended to provide investors the opportunity to achieve multi-asset diversification, as well as the structural simplicity and regulatory clarity associated with holding each deal through a separate O-Fund vehicle. While subject to market conditions, Amina Fund expects to have 3-4 limited-asset funds available for allocation within an investor’s 180-day window.
Amina Fund has stated that it intends to hold O-Zone deals for at least 10 years to maximize the advantage of the potential tax savings. Will I be able to dispose of my interest in the O-Fund prior to the 10-year hold period?
Short answer. Yes. Achieving liquidity prior to the full hold period will not necessarily negate the tax benefits to you since the rules permit further rollover of gains realized upon a sale of your interest in the O-Fund. Please note that the purchaser of your units may not be able to receive any of the O-Zone tax benefits, though s/he may be able to earn significant returns from the assets’ cash flow, appreciation and/or growth.
What is Amina Fund’s exit strategy?
O-Zones Rules stipulate that investors must sell their O-Fund interests in order to claim the benefit of eliminating capital gains tax on investment appreciation. This is a key reason Amina Fund has chosen to set up limited-asset funds as opposed to funds where managers may need to execute a portfolio sale across a large number of assets. Generally, each Amina O-Fund will be structured as a 15-year partnership, subject to customary extension options. We expect to seek to optimize a sale between years 10 and 15. The terms of each Amina O-Fund can vary, and investors should review the terms of each investment before deciding to invest.
Next Steps for Interested Investors
Complete the Initial Investor Screening questions to ensure you meet the accredited investor requirements. Amina Fund will share more information about Amina O-Zones as part of the Investor Certification process. Once you’ve certified your accredited or institutional investor status, you’ll be able to make your initial investment.