To encourage development and new construction in LICs, Congress authorized the creation of Qualified Opportunity Funds. The appeal of investing into a Qualified Opportunity Fund (QOF) is that investors reallocating gains from other investments into such funds may qualify for a number of substantial tax breaks (described further below).
The name “Qualified Opportunity Fund” may conjure up thoughts of mutual funds, exchange-traded funds, and other registered investments, but the reality is that QOFs are substantially easier to create and maintain than such investments. A QOF is simply a corporation or partnership for federal tax purposes, which is created for the purpose of investing in qualified opportunity zone property and holds at least 90% of its assets in “qualified opportunity zone property.” Such property consists of the following:
QOZ stock – QOZ stock must be acquired at its original issue from the corporation solely for cash, and substantially all of the business’s tangible assets (owned and leased) must be QOZ property.
QOZ partnership interest – Such interests must be acquired at its original issue from the partnership solely for cash, and substantially all of the business’s tangible assets (owned and leased) must be QOZ property.
QOZ business property – Tangible property acquired after December 31, 2017, which is first used within the QOZ after acquisition by the QOF, or which is substantially improved by the QOF after acquisition. To “substantially improve” property, a QOF must increase the basis of the acquired property by an amount that exceeds the initial basis (effectively more than doubling its basis) within the 30-month window following acquisition.
Or stated more simply, a Qualified Opportunity Fund is simply a business entity that invests in tangible property (most likely real estate and similar development projects) within a Qualified Opportunity Zone, in which investors can participate by putting their own investment assets into the QOF to be invested accordingly.