An Opportunity Zone Fund is a corporation or a partnership formed for the purpose of investing in qualified Opportunity Zone property and which holds 90% of its assets in qualified Opportunity Zone property.
Qualified Opportunity Zone property can be tangible property located in an Opportunity Zone or a partnership interest or stock held by an Opportunity Zone Fund in a partnership or corporation which is a qualified Opportunity Zone business.
The conventional real estate investment fund owns multiple assets and, within certain parameters, the manager of the fund buys and sells properties throughout the life of the fund. One of the main tax benefits of an investment in an Opportunity Zone Fund is that a taxpayer will recognize no gain on the disposition of the taxpayer’s investment in the Opportunity Zone Fund if such investment is held for 10 years the regulations do not offer the same benefits upon the disposition of an asset held by an Opportunity Zone Fund.
If an Opportunity Zone Fund sells a particular property, a taxpayer will recognize a pro-rata portion of the gain attributable to such sale and will not be able to defer the gain unless the taxpayer rolls the gain into another Opportunity Zone Fund. Even if a multi-asset fund held all of its properties for the 10-year period, it would be difficult to sell the equity interests in the fund, given the fund would need to find a buyer that is interested in buying an entire portfolio rather than a specific property.
Although such a structure is a more efficient use of capital by a fund, investors in an Opportunity Zone Fund may only take advantage of the tax benefits by investing capital gains and it is unlikely that investors will have a continuous flow of capital gains to invest in a multi-asset fund as capital calls are made.