Opportunity

Zones
Explained
The Beginner’s Guide To OZs

Jimmy Atkinson
Founder of OpportunityDb
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Opportunity Zones Explained

The Beginner’s Guide To Opportunity Zones

By Jimmy Atkinson
Founder of OpportunityDb & OZ Insiders
Host of The Opportunity Zones Podcast

Updated February 10, 2024

Introduction
The Opportunity Zone policy isn’t just the biggest economic development program in
U.S. history.

It’s also the greatest tax incentive ever created.

Using Opportunity Zones, investors now have the opportunity to unlock unlimited
tax-free growth.

This guide provides comprehensive

information on Opportunity Zones, how to
invest, and the powerful tax benefits
available to investors.

Want a video version of this guide? I

created a 25-minute crash course that’s
now available on YouTube.
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Table of Contents

Chapter 1: Opportunity Zones Explained

Chapter 2: Opportunity Zone Tax Benefits – Unlimited Tax-Free Growth

Chapter 3: A Brief History Of Opportunity Zones

Chapter 4: Opportunity Zones Map – Where QOZs Are Located

Chapter 5: The Two Ways To Invest In Opportunity Zones (Active vs.

Passive)

Chapter 6: How To Invest In Opportunity Zone Funds (As A Passive LP)

Chapter 7: How To Start Your Own Qualified Opportunity Zone Fund (As An
Active GP)

Chapter 8: Opportunity Zones vs. 1031 Exchanges

Appendix: The Best Opportunity Zone Resources To Learn More

About The Author

Jimmy Atkinson is a renowned Opportunity Zones industry
leader. He founded OpportunityDb in 2018 as the leading OZ
educational platform and investment marketplace. He is also
founder of OZ Insiders, the premier private community for
Opportunity Zone professionals and investors. And he hosts
The Opportunity Zones Podcast.
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Chapter 1: Opportunity Zones Explained

Opportunity Zones are a powerful yet time-limited tax incentive, driving the most
significant economic development initiative in U.S. history.

The incentive gives investors a new way to generate unlimited tax-free growth, making it
the greatest tax-advantaged investment program ever created.

The Opportunity Zone tax incentive was enacted as part of the Tax Cuts & Jobs Act of
2017. It is a bipartisan place-based economic development policy that incentivizes
long-term investment in economically distressed communities all across the United
States.

There are multiple tax benefits for U.S. taxpayers with capital gains who invest in
Opportunity Zone locations, but the major benefit is this: once an investor achieves a
10-year holding period within an Opportunity Zone investment, the gain from the sale of
the investment is 100% tax-free.

Real estate developers and entrepreneurs are using Opportunity Zones to attract equity
investors into their projects.

High Net Worth investors, family offices, and financial advisors are using Opportunity
Zones to invest in highly tax-advantaged real estate and venture capital deals — and
achieve unlimited tax-free growth.

By 2022, Opportunity Zones had already attracted over $100 billion in equity investment.

What Constitutes An Opportunity Zone Investment?

In order to incentivize private capital investment into economically distressed areas, the
federal government (and numerous conforming state governments) offer powerful tax
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benefits for Opportunity Zone investors. But there are some requirements that investors
should be aware of.

Firstly, only eligible gains (including capital gains and qualified 1231 gains) that are
timely invested into Qualified Opportunity Funds are able to receive preferential tax
treatment.

And, in order to qualify as an Opportunity Zone investment, the underlying asset must
satisfy a number of requirements, including (but not limited to):

1. The asset must be physically located in a Qualified Opportunity Zone.

2. The asset must drive new economic activity in the community, either by
satisfying the “original use” requirement, or the “substantial improvement”
requirement. It cannot simply be an existing asset that goes unimproved.

The underlying project can be funded like any ordinary asset – with a combination of
equity, debt financing, and tax credits. Opportunity Zone projects can form a Qualified
Opportunity Fund as a wrapper for the OZ equity portion of the capital stack.

Equity investors in an Opportunity Zone asset can achieve the tax benefits of OZ
investing by reinvesting eligible gains dollars into a Qualified Opportunity Fund that then
deploys the dollars into the asset.

Qualified Opportunity Funds

To receive the preferential tax treatment that Opportunity Zone investing offers,
investments must flow through an investment vehicle newly created in the Opportunity
Zones legislation — the Qualified Opportunity Fund.

Qualified Opportunity Funds can be structured as corporations or partnerships. They

must invest substantially in: 1) Qualified Opportunity Zone Businesses (QOZBs) that
hold Qualified Opportunity Zone Business Property (QOZBP), 2) Qualified Opportunity
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Zone Property (QOZP) directly, or 3) a combination of the two. In general, a Qualified

Opportunity Fund must hold at least 90 percent of its assets in QOZBs or other QOZP.

Certain “sin” businesses (golf courses, country clubs, massage parlors, hot tub facilities,
suntan facilities, racetracks or other facilities used for gambling, and liquor stores) are
prohibited as qualifying assets under the Opportunity Zone legislation.

Opportunity Zone Facts And Figures

On June 14, 2018, the U.S. Treasury and IRS finalized certification of the Opportunity
Zones. In total, 8,762 census tracts were certified as Qualified Opportunity Zones. These
zones are located in all 50 states, the District of Columbia, and all five inhabited
overseas territories. In December 2018, new data from the Census Bureau allowed for
Puerto Rico to be granted two additional Opportunity Zones, bringing the final total to
8,764.

A total of 8,534 out of 31,866 census tracts defined as low-income were designated as
Opportunity Zones. An additional 230 eligible contiguous tracts (not defined as
low-income) were designated as well.

Nearly 35 million Americans live in these zones, per 2015 American Community Survey
data. The average poverty rate in the Opportunity Zones is 32 percent, compared to 17
percent for the average census tract.

Technical Opportunity Zone Terminology

Qualified Opportunity Zone (also known more simply as Opportunity Zone, QOZ, or OZ)
— A census tract (geographic location) based on the 2010 census map that has been
certified as a Qualified Opportunity Zone by the IRS.

Qualified Opportunity Fund (QOF) — An entity (typically an LLC taxed as a partnership,

or a corporation) that self-elects via IRS Form 8996 annually to be treated as a Qualified
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Opportunity Fund, and serves as an investment vehicle through which OZ-eligible gains
need to flow into. In order to remain in compliance, a QOF needs to deploy at least 90%
of its capital into Qualified Opportunity Zone Property (QOZP), among other
requirements.

Qualified Opportunity Zone Property (QOZP) — Qualified Opportunity Zone stock, a

Qualified Opportunity Zone partnership interest, and/or Qualified Opportunity Zone
Business Property (QOZB), i.e. the underlying asset that is receiving the investment.

Qualified Opportunity Zone Business (QOZB) — An active trade or business in which at

least 70% of the tangible property owned or leased by the corporation or partnership is
Qualified Opportunity Zone Business Property (QOZBP).

Qualified Opportunity Zone Business Property (QOZBP) — Tangible property used in a

trade or business of the QOZB. In order to qualify as QOZBP, 1) the property must have
been acquired by the QOZB after December 31, 2017; 2) the original use of the property
in a qualified opportunity zone (QOZ) starts with the QOZB, or the QOZB substantially
improves the property, and 3) substantially all of the use of the property was in a
qualified opportunity zone during substantially all of the time the QOZB held the
property.

IRC Section 1400Z — The Internal Revenue Code Section that codifies Opportunity Zone
designation and tax treatment of Qualified Opportunity Funds. Enabled by the
enactment of the Tax Cuts & Jobs Act of 2017.

Chapter 2: Opportunity Zone Tax Benefits

To encourage investment in economically distressed Opportunity Zones, there are
multiple tax benefits available to U.S. taxpayers who reinvest eligible gains into
Opportunity Zones via a Qualified Opportunity Fund.
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The ability to achieve unlimited tax-free growth makes Opportunity Zones the greatest
tax break ever created.

Powerful tax breaks are available to a taxpayer who reinvests an eligible gain into a
Qualified Opportunity Fund within 180 days of triggering the gain. Eligible gains include
both capital gains and qualified 1231 gains that would be recognized for federal income
tax purposes before January 1, 2027.

The tax benefits include:

1. Deferral of eligible gains until December 31, 2026.

2. Reduction of eligible gains liability. (Note: this provision expired in two

phases: on December 31, 2019 and December 31, 2021.)

3. The big one: Elimination of tax on gains accrued in the Qualified

Opportunity Fund after achieving a 10-year holding period.

4. Plus, no depreciation recapture!

Benefit #1: Deferral of eligible gain recognition until

December 31, 2026.

Any eligible gains reinvested into a Qualified Opportunity Fund within 180 days will be
tax deferred until December 31, 2026, or the date on which the Qualified Opportunity
Fund investment is sold, whichever is earlier.

This benefit essentially amounts to an interest-free loan from the federal government. A
tax bill on a capital gain that would normally be due on April 15th of the year following
the transaction date is now deferred until April 15, 2027.
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Investors in Qualified Opportunity Funds need to file IRS Form 8997 annually with their tax returns.

(EXPIRED) Benefit #2: Reduction of eligible gains tax

liability.

This benefit has now expired. But initially, eligible gains that were reinvested into
Qualified Opportunity Funds by December 31, 2019 were eligible for a 15% basis step-up
(essentially reducing the taxpayer’s 2026 gains bill by 15%.)

A 10% basis step-up was available for gains reinvested by December 31, 2021.
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As of January 1, 2022, there is no longer such a basis step-up benefit for the reinvested
gain. But the biggest benefit (#3, below) is still available.

Benefit #3: Unlimited tax-free growth! The 100%

elimination of tax on capital gains from the sale of
Qualified Opportunity Fund investments.

This is by far the biggest Opportunity Zone tax break, and the #1 reason why
sophisticated investors are reinvesting capital gains in Qualified Opportunity Funds.

So long as a Qualified Opportunity Fund investment is held for at least 10 years, the
basis of the investment will be adjusted to be equal to the fair market value of the
investment on the date on which it is sold. In other words, there is zero capital gains tax
due on any profits from the sale of an Opportunity Zone investment after a 10-year
holding period.

Assuming a certain level of returns and tax bracket, an OZ investment can deliver 40 to
50 percent higher after-tax returns than a non-OZ investment. The table below
compares the 10-year after-tax returns of a Qualified Opportunity Fund investment to a
comparable non-OZ investment.

Non-OZ Investment Qualified Opportunity Fund

Initial Gain $1,000,000 $1,000,000

Tax on Gain ($238,000) Deferred

After-Tax Investable Amount $762,000 $1,000,000

Compounded Annual Return 8% 8%

Value After 10 Years $1,645,100 $2,158,925

Total Appreciation $645,100 $920,925

Tax on Appreciation ($153,534) $0

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Capital Gains Tax Paid in 2027 $0 ($238,000)

Ending After-Tax Value $1,491,466 $1,920,925

This assumes a 23.8% tax rate applied to capital gains at time of investment and in the 2026 tax year.

Benefit #4: No depreciation recapture.

A fourth benefit (not even included in the table above) is the elimination of depreciation
recapture. This can have a massive impact on the triple net returns of an investment
that includes one or more depreciable assets. Typically when an asset is depreciated
over time (a common accounting practice in real estate), the yearly depreciation is used
to offset taxable income.

But when the asset is sold at a gain, the ordinary income tax rate is applied to the
amount of the depreciation previously taken on the asset. In an Opportunity Zone
investment, this depreciation recapture is 100% eliminated.

Chapter 3: A Brief History Of Opportunity

Zones
A brief history of Opportunity Zones (and why they exist in the first place) can provide
helpful context for participants in the program.

Opportunity Zones are a place-based economic development program that was first
conceptualized by the Economic Innovation Group (EIG) in a 2015 white paper,
Unlocking Private Capital to Facilitate Economic Growth in Distressed Areas.
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The white paper was co-authored in bipartisan fashion by Jared Bernstein and Kevin
Hasset. Bernstein is a Democrat who had previously served as an economic adviser to
then-Vice President Joe Biden and would later return to the White House to serve as
chair of President Biden’s Council of Economic Advisers. Kevin Hasset is a Republican
who would later become a senior economic adviser to President Donald Trump.

Policymakers studying the recovery following the Great Recession of 2007-09 noticed
that wealthy communities recovered very quickly, but low-income communities got left
behind. Wealth inequality and income inequality had increased significantly.

By just about any measure, wealth and income inequality in the U.S. today are near their
highest levels since World War II.

And thus, policymakers on both sides of the aisle were in search of a solution to help
address these societal concerns. The policy challenge was, “How can we incentivize
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wealthy individuals to invest some of their wealth into these low-income areas to
stimulate these local economies at scale?”

The solution was Opportunity Zones, a bipartisan, place-based policy initiative that
incentivizes investors to redeploy gains from successful investments into new,
long-term investments in struggling communities that normally don’t receive private
investment dollars.

The policy goal of Opportunity Zones is to stimulate economic revitalization in

low-income communities. And the investor incentives to help achieve this outcome are
capital gains tax deferral and unlimited tax-free growth.

Opportunity Zone legislation was first introduced in 2016 and subsequently

reintroduced in 2017 as the Investing in Opportunity Act. The bill was championed by
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Senators Tim Scott (R-SC) and Cory Booker (D-NJ) and Representatives Pat Tiberi
(R-OH) and Ron Kind (D-WI).

Most of the provisions contained within the Investing in Opportunity Act were eventually
enacted as part of the 2017 Tax Cuts & Jobs Act, which was signed into law by
President Donald Trump on December 22, 2017.

Senators Tim Scott (R-SC) and Cory Booker (D-NJ) were co-sponsors of the “Investing in Opportunity Act.”

Equity Investment in Opportunity Zones

EIG founder Steve Glickman claimed in 2018 that Opportunity Zones would be “the
biggest economic development program in U.S. history.” Then-Treasury Secretary
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Steven Mnuchin predicted that over $100 billion in private capital would be invested in
Opportunity Zones.

Opportunity Zones have shattered the expectations of even the most optimistic
supporters of the program. In October 2022, OpportunityDb extrapolated Novogradac
survey data to estimate that Opportunity Zone investments had likely already exceeded
$100 billion.

Opportunity Zones Timeline

April 15, 2015 Opportunity Zones first conceptualized in EIG white paper.

April 27, 2016 Investing in Opportunity Act introduced in 114th Congress.

February 2, 2017 Investing in Opportunity Act reintroduced in 115th Congress.

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December 22, 2017 Opportunity Zones legislation enacted as part of the Tax Cuts &
Jobs Act.

Early 2018 U.S. states, territories, and the District of Columbia nominated
census tracts as Qualified Opportunity Zones.

July 9, 2018 8,762 Qualified Opportunity Zones certified by IRS in Bulletin

2018-28. The first QOFs launched later this month.

August 1, 2018 OpportunityDb launched.

December 14, 2018 Treasury certified two additional Opportunity Zones in Puerto
Rico, bringing the total (and current) number of OZs to 8,764.

December 19, 2019 IRS issued final regulations on Opportunity Zones.

December 31, 2019 15% basis step-up benefit expired after this date.

December 31, 2021 10% basis step-up benefit fully expired after this date. (But the
biggest benefits are still available.)

April 7, 2022 Opportunity Zones Transparency, Extension, and Improvement Act

introduced in 117th Congress. The bill failed to advance.

September 2023 Opportunity Zones Transparency, Extension, and Improvement Act

reintroduced in 118th Congress. This bill has not yet passed.

December 31, 2026 Gain deferral date. Unless extended by Congress, gains triggered
after this date will not be eligible for OZ investment.

April 2027 Deferred eligible gains tax liability due for OZ investors.

June 28, 2027 Last possible date on which an investor can invest a 2026 gain
into a Qualified Opportunity Fund, assuming gain on 12/31/2026.

September 11, 2027 Last date on which an investor can invest a 2026 gain reported on
a K-1 into a Qualified Opportunity Fund.
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Chapter 4: Opportunity Zones Map – Where

Opportunity Zones Are Located
The Opportunity Zone legislation – passed as part of the Tax Cuts & Jobs Act of 2017 –
asked the governors from all 50 states and U.S. territories, plus the mayor of
Washington DC, to nominate Opportunity Zones from their jurisdictions. The governors
could nominate up to 25 percent of their low-income census tracts, as defined by
Section 45D(e)(1).

An exception to the 25-percent rule was made for states with fewer than 100 eligible
tracts; these states were allowed up to 25 tracts to be designated as Opportunity Zones.
Alaska, Delaware, the District of Columbia, Guam, Hawaii, Montana, North Dakota,
Rhode Island, South Dakota, Vermont, and Wyoming were able to take advantage of this
exception. As a result, they each have exactly 25 Opportunity Zones.

American Samoa, Northern Mariana Islands, and Virgin Islands each have fewer than 25
eligible census tracts. As a result, 100 percent of their eligible tracts were designated as
Opportunity Zones.

Additionally, the 2018 Bipartisan Budget Act allowed for every low-income census tract
and eligible non-LIC census tract in Puerto Rico to be certified as a Qualified Opportunity
Zone. As a result, nearly the entire island of Puerto Rico lies within an Opportunity Zone.

This exception was made for Puerto Rico to help the island recover from the
catastrophic damage caused by Hurricane Maria in 2017.

In the months following the enactment of the Tax Cuts & Jobs Act of 2017, thousands
of census tracts were nominated as Opportunity Zones by each U.S. state, territory, and
Washington DC. In 2018, the IRS and Treasury Department certified 8,764 census tracts
as Qualified Opportunity Zones.
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Puerto Rico suffered massive damage from Hurricane Maria in 2017.

A total of 8,534 out of 31,866 census tracts defined as low-income were designated as
Opportunity Zones. An additional 230 eligible contiguous tracts (not defined as
low-income) were designated as well.

Opportunity Zones are located in urban, suburban, and rural areas. They are in every
major city in the United States. They are in every state and overseas territory. And they
are in our nation’s capital. Opportunity Zones account for roughly 12 percent of the
landmass of the country. Chances are you live in or not far from an Opportunity Zone.

Nearly 35 million Americans live in these zones, per 2015 American Community Survey
data. The average poverty rate in the Opportunity Zones is 32 percent, compared to 17
percent for the average census tract.
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And now, without further ado, the Opportunity Zone map:

A total of 8,764 census tracts are certified as Qualified Opportunity Zones.

An interactive Opportunity Zone map is available at OpportunityDb.com/map

A breakdown of OZs by location can be found at https://opportunitydb.com/location/

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Chapter 5: The Two Ways To Invest In

Opportunity Zones (Active vs. Passive)
In general, there are two ways to invest in Opportunity Zones:

● Active QOF Investment: An investor who has realized a gain and wishes to take a
hands-on approach to managing his next investment as a general partner, or GP,
may create his own Qualified Opportunity Fund and invest his gain into this QOF
to fund a property, business, or portfolio of assets. This is also known as a
“captive” or “self-funded” QOF strategy.

● Passive QOF Investment: Alternatively, an investor may take a more “hands off”
approach by investing his gains into a third-party Qualified Opportunity Fund that
is raising equity from investors. This is similar to investing in a private equity fund
as a passive limited partner, or LP investor.

Who Can Invest?

Opportunity Zone investing is most appropriate for High Net Worth investors and family
offices who have U.S. tax liabilities resulting from capital gains and/or 1231 gains. This
eligible gain may come from the sale of real estate, publicly traded stocks, bonds,
mutual funds, and ETFs, privately held business, cryptocurrency, collectables, or nearly
any other type of asset that would generate an eligible gain.

Practically speaking, passive Opportunity Zone investments (investing into a third-party

fund as an LP investor) are best suited for taxpayers with at least $50,000 in eligible
gains.

Active Opportunity Zone investments (creating a Qualified Opportunity Fund for the
purposes of directly developing properties in an Opportunity Zone with one’s own gains
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as a GP investor) are most appropriate for High Net Worth investors and family offices
with at least $250,000 in eligible gains.

Eligible Investments

Investors who reinvest taxable eligible gains into Qualified Opportunity Funds (QOFs)
are eligible for the tax benefits of Opportunity Zone investing.

Non-gains dollars can be invested in Qualified Opportunity Funds, but are not eligible for
any of the tax benefits.

In theory, the gain could be as little as $1. But in practice, a QOF investment may not be
appropriate for investors with gain amounts under $50,000.

I say this for two reasons:

1. There is some overhead to being an Opportunity Zone investor, in the form of

additional tax forms that you’ll deal with every year, and additional fees that your
CPA may charge you as a result.

2. The minimum investment amount for most Qualified Opportunity Funds is usually
at least $50,000, if not higher. Also note that due to SEC requirements, most
funds are usually open only to accredited investors.1

1
As defined by the Securities and Exchange Commission (SEC), an accredited investor is a person with an
annual income of at least $200,000 (or $300,000 if combined with a spouse’s income); or who has a net
worth in excess of $1 million (excluding his/her primary residence.
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Additional Considerations

Aside from the eligible gains requirement, there are a few other considerations for
potential Opportunity Zone investors.

One is the need for patient capital. In order to achieve the full tax benefit of Opportunity
Zone investing, the Opportunity Zone investment must be held for a minimum of 10
years. A Qualified Opportunity Fund is an illiquid investment with a long lock-up period,
often with little or no cash flow in the first several years.

The need for liquidity in 2027 is another consideration. An eligible gain can be deferred
until December 31, 2026 if it is reinvested into a Qualified Opportunity Fund. But, the tax
on this initial gain will come due in April 2027. Investors should plan accordingly for this
deferred tax liability.

And finally, an investor should determine the suitability of such an investment within
his/her portfolio. Your investment objectives, risk tolerance, and time horizon should be
consistent with the characteristics of an Opportunity Zone investment, which tend to fall
toward the higher risk end of the risk-return spectrum.

Opportunity Zone Investment Requirements

All qualifying Opportunity Zone investments must flow through an entity known as a
Qualified Opportunity Fund (QOF). This is a new vehicle that was established in the OZ
legislation in 2017.

In general, an investor has 180 days from the realization of their eligible gain to re-invest
the gain (or a portion of the gain) into a Qualified Opportunity Fund (QOF).
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Chapter 6: How To Invest In Opportunity

Zone Funds (As A Passive LP)
Investing in Opportunity Zones as a “passive” limited partner investor, or LP, involves
identifying an existing Qualified Opportunity Fund that is raising Opportunity Zone equity
from investors to fund an OZ project or portfolio of OZ projects.

In general, Qualified Opportunity Funds are private placement funds that do not trade
publicly on an exchange. That is to say, shares (or interests) in Qualified Opportunity
Funds are not available at a brokerage in the traditional way stocks, bonds, mutual
funds, or ETFs are bought and sold. Rather, Qualified Opportunity Funds are more
similar to private equity funds or private equity real estate funds.

Private Placement Opportunity Zone Funds For

Accredited Investors
Most private placement Qualified Opportunity Funds (QOFs) that are raising money from
investors are issued under SEC Regulation D, Rule 506(b) or Rule 506(c). Funds that
raise money under Rule 506(b) are open mostly to accredited investors. Funds that raise
money under Rule 506(c) are open only to accredited investors. Here’s what this means:
with very few exceptions, QOF investors must be accredited investors.

An accredited investor is an individual with annual income of at least $200,000 (or

$300,000 of joint income with spouse) over the last two years, or net worth exceeding
$1 million (not including primary residence). Financial professionals with Series 7, 65 or
82 licenses also qualify as accredited investors.

Investors in QOFs are usually required to provide proof of accredited investor status to
the QOF manager. This can be a letter from the investor’s attorney, CPA, or financial
advisor, or it can be performed through a third-party verification service such as
VerifyInvestor.com.
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Investment minimums in most Qualified Opportunity Funds that are raising capital are
often in the 5- or 6-figure dollar range. Typical investment minimums can range from
$50,000 to $100,000, with some funds requiring a minimum investment of $250,000, or
even $1 million.

At any given time, there are dozens if not hundreds of Qualified Opportunity Funds that
are raising capital from investors. A list of Opportunity Zone funds is available on
OpportunityDb.com.

Variety Of Investment Options

Any Qualified Opportunity Fund must meet the requirements summarized in the
preceding pages. But those requirements allow for a wide range of asset classes and
investment strategies. And, indeed, there are existing QOFs that invest in both operating
businesses and real estate.

Within the real estate asset class, there are funds that target specific sectors (such as
multifamily, industrial, retail, etc.) as well as those that offer a more diversified portfolio.
Similarly, some QOFs focus on a single city or region while others will invest nationally.

Typically, passive investors are referred to as limited partners (LPs) while the individuals
who are managing the Qualified Opportunity Fund (QOF) are general partners (GPs).
GPs will often charge a management fee as well as a carried interest (often referred to
as a “carry” or “sponsor promote”) that allows them to participate in the profit of the
project.

For example, a GP may charge an annual management fee equal to 1% of assets under
management, plus a carried interest of 20% of the project profits over a preferred return,
generally in the 8% to 10% range. But there is no set fee structure; rather, fees paid by LP
to GPs can be arranged in numerous ways.
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Regardless of which strategy they are pursuing, QOF investors must file IRS Form 8997
annually with their tax return in order to properly claim the Opportunity Zone tax breaks.

Questions To Ask Before Investing As An LP

Below are several questions that investors who would like to invest in a Qualified
Opportunity Fund may wish to ask as part of their due diligence:

● What is the minimum investment amount?

● Is this a single-asset fund or a diversified multi-asset fund?
● What asset class(es) will the fund invest in?
● Is this a blind pool fund? Or is there an identified pipeline of projects?
● What geographic locations will the fund invest in?
● Who is the fund sponsor? Who is the developer? What are their track records?
● How much committed capital does the fund have so far?
● How much money have the GPs in the fund committed personally?
● What are the projected returns? When are cash distributions anticipated to begin?
● What are the fees and sponsor promote, and preferred return?

Qualified Opportunity Funds Now Open and Accepting

New Investors

If you are a High Net Worth investor with capital gains, you may be interested in one or
more of these OZ funds that have recently partnered with us on our OZ Pitch Day
events.
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Min.
Fund Fund Type Geographic Focus Fund Size Investment
Multi-Asset Ground-Up
Urban Catalyst Opportunity Real Estate
Zone Fund II Development San Jose, CA $200 million $250,000
Caliber Tax Advantaged
Opportunity Zone Fund II Multi-Asset Real Estate Greater Southwest $500 million $100,000
Phoenix Stadium OZ
Self-Storage Development New Self-Storage
by YourSpace America Development Phoenix, AZ $9.4 million $100,000

To view additional funds, visit our list of Opportunity Zone Funds.

Chapter 7: How To Start Your Own

Qualified Opportunity Zone Fund (As An
Active GP)
Qualified Opportunity Funds (QOFs) were created under the Investing in Opportunity Act,
a version of which was passed as part of President Trump’s Tax Cuts & Jobs Act of
2017. These new Opportunity Zone funds provide massive tax incentives for re-investing
capital gains in some of America’s most economically distressed communities.

Starting a Qualified Opportunity Fund is easy. Ongoing maintenance of the fund

(including administration, compliance, and accounting) will usually require professional
guidance.

There is no approval process to start a Qualified Opportunity Fund. A QOF is simply a

regarded entity (typically a partnership LLC, S-corp, or C-corp) that elects to be taxed as
 26

a Qualified Opportunity Fund by filing IRS Form 8996 annually. If you are interested in
setting up and managing your own Qualified Opportunity Fund, you will be responsible
for creating the entity, filing form 8996, and ensuring that your QOF meets the various
compliance requirements at regular intervals.

Practical Considerations For Starting A QOF

Starting a QOF to manage your own deals can be appropriate for any individual with
eligible gains of at least $250,000. For investors with gains under this amount, it
probably makes more sense to look into investing as an LP, rather than starting your
own fund.

Initial QOF formation and structuring by an attorney can cost at least $10,000. Ongoing
compliance and accounting can cost $5,000 or more annually. So a QOF with a 10-year
holding period is going to cost at least $60,000 in administrative expenses. This is for a
very simple, self-managed (“captive”) QOF with no outside investors.

QOFs that need to raise capital from outside investors will spend much more in set-up
costs and ongoing administrative and marketing or brokerage fees. A Private Placement
Memorandum (PPM) can cost $25,000 or more to prepare with a securities attorney.

Qualified Opportunity Fund Compliance Requirements

QOFs must comply with a number of requirements in order to adhere to the legislative
intent of the OZ tax policy.

The U.S. tax code defines a Qualified Opportunity Fund as an investment vehicle that
invests in Qualified Opportunity Zone Property. Specifically as follows:

The term “qualified opportunity fund” means any investment vehicle which is
organized as a corporation or a partnership for the purpose of investing in qualified
opportunity zone property (other than another qualified opportunity fund) that
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holds at least 90 percent of its assets in qualified opportunity zone property,

determined by the average of the percentage of qualified opportunity zone property
held in the fund as measured—(A) on the last day of the first 6-month period of the
taxable year of the fund, and (B) on the last day of the taxable year of the fund.

Opportunity Zone property can be either an Opportunity Zone business or Opportunity

Zone business property. Put another way, a Qualified Opportunity Fund has two options:

1. It can invest in Opportunity Zone businesses that hold tangible property located
within Opportunity Zones.

2. It can essentially become an Opportunity Zone business by investing directly in

tangible property located within Opportunity Zones.

In practice, most Qualified Opportunity Funds opt for the first option, structuring such
that the fund holds an underlying QOZB (or multiple QOZBs). The QOZB then holds the
actual assets (the QOZB property, or QOZBP).

Let’s now define these two terms — Qualified Opportunity Zone Business (QOZB) and
Qualified Opportunity Zone Business Property (QOZBP).

Qualified Opportunity Zone Business (QOZB)

A QOZB can be either a corporation or partnership. In general, a QOZB is a trade or

business in which substantially all of the tangible property of the business qualifies as
follows:

● Such property was acquired by the business by purchase after December 31,
2017.

● The original use of such property in the Opportunity Zone commences with the
QOZB, or the QOZB substantially improves the property.
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● During substantially all of the QOZB’s holding period for such property,
substantially all of the use of such property was in an Opportunity Zone.

Furthermore, the QOZB must also adhere to the following criteria:

● At least 50 percent of the total gross income of the QOZB is derived from the
active conduct of such business.

● A substantial portion of the intangible property of the QOZB is used in the active
conduct of such business.

● Less than 5 percent of the average of the aggregate unadjusted bases of the
property of a QOZB is attributable to nonqualified financial property.

And finally, the following types of “sin” businesses are ineligible to be deemed as a
Qualified Opportunity Zone Business, per the Opportunity Zones statute Section
1400Z-2 — private or commercial golf course, country club, massage parlor, hot tub
facility, suntan facility, racetrack or other facility used for gambling, or liquor stores.

Qualified Opportunity Zone Business Property (QOZBP)

QOZBP is tangible property used in a trade or business of a Qualified Opportunity Fund,

so long as it meets the following three conditions:

● Such property was acquired by the Qualified Opportunity Fund by purchase after
December 31, 2017.

● The original use of such property in the Opportunity Zone commences with the
Qualified Opportunity Fund, or the fund substantially improves the property.

● During substantially all of the Qualified Opportunity Fund’s holding period for
such property, substantially all of the use of such property was in an Opportunity
Zone.
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Summary Of QOF Compliance Requirements

To summarize the key requirements of Qualified Opportunity Funds:

● 90% Asset Test. QOFs must invest at least 90% of their assets in qualified
opportunity zone property.

● Original Use or Substantial Improvement. Opportunity zone property must be

either original use (e.g., new construction of a building) or substantial
improvement of existing property. Typically, this requirement is met when the
basis of a property is doubled (e.g., an investor purchases a building for $1
million and invests at least $1 million additionally in improvements).

There are additional requirements around the date of purchase (must be after
December 31, 2017) and prohibitions on “related party” acquisitions (i.e., you can’t sell a
property to yourself or a family member).

Questions About Creating Your Own QOF?

If you’re interested in setting up your own QOF but aren’t sure exactly where to start, join
the OZ Insiders community to connect with leading experts in the OZ industry who can
guide you through the process.
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Chapter 8: Opportunity Zones vs. 1031

Exchanges
Sophisticated real estate investors are familiar with Section 1031 exchanges, and
related Delaware statutory trusts (DSTs). Opportunity Zones appear similar at first
glance. But there are some substantial differences, summarized below.

Rollover

In a Section 1031 exchange, an investor must reinvest the entire proceeds from the
transaction (principal, plus gain) within 180 days in order to achieve the full tax benefit.
Any amount from the proceeds that is not reinvested is taxable “boot.” A Section 1031
transaction must be conducted through a 1031 exchange accommodator, also known
as a qualified intermediary.

With an Opportunity Zone investment, an investor is only responsible for rolling over the
gain amount within 180 days. The investor is not required to deploy the entire gain, but
only the rolled over portion is eligible for tax advantages. Moreover, the principal can be
used for anything. It does not need to be rolled over. And, placing an investment in a
Qualified Opportunity Fund is much more straightforward, with no intermediary required.

Qualified Assets

Only real estate gains are eligible for 1031 like-kind exchanges. Conversely, gains from
any type of asset sale (real estate, stocks, bonds, etc.) can qualify for investment in a
Qualified Opportunity Fund. Section 1231 gain is also eligible for investment in Qualified
Opportunity Funds.
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Investment Structure

A Section 1031 exchange is structured to allow for single asset swaps, usually one real
estate property for another real estate property. Multiple properties can be supported,
but this option usually comes with higher costs and less flexibility.

On the other hand, Qualified Opportunity Funds can be either single-asset funds that
invest in a single property or business, or multi-asset funds that invest in multiple
properties across asset classes and geographies.

Capital Gains Tax Deferral

Capital gains tax payments on a 1031 exchange can be deferred indefinitely. With
Qualified Opportunity Funds, capital gains of the initial investment may be deferred until
December 31, 2026.

Basis Step-Up And Capital Gains Tax Elimination

With 1031 exchanges, capital gains are eliminated via a step-up in basis to fair market
value for the property owner’s heirs at death. With Qualified Opportunity Funds, the
investor doesn’t have to die first. The basis step-up to fair market value (resulting in zero
capital gains tax liability) occurs after the Qualified Opportunity Fund investment has
been held for at least 10 years.

Location, Location, Location

With a 1031 exchange, the investor’s real estate can be located anywhere in the country.
 32

Conversely, Qualified Opportunity Fund investments are limited (mostly) to Qualified

Opportunity Zone Property located in Opportunity Zones.

The table below compares how Qualified Opportunity Fund investment differs from
1031 Exchanges and DSTs.

Investment Aspect Qualified Opportunity Fund 1031 Exchange / DSTs

Full Tax Benefit 10-year holding period Upon death

Timeline

Triple Net Leasing Limited Allowed

Capital Gain Eligibility Any type of gain. Can be Like-kind exchange. Must be a
invested into a QOF that gain from real estate. Can only
holds real estate and/or be invested into another real
operating business(es). estate investment property.

Investment Amount Tax benefit applies only to Entire sales proceeds

the gain. Can reinvest full or (principal and gain) must be
partial gain. rolled over for the full benefit.

Investment Strategy / Capital Appreciation. Varies (Traditional 1031).

Risk Ground-up construction, Stable Cash Flow (DST).
redevelopment, or
early-stage business.

Timeline For 180 Days 45-Day Rule & 180-Day Rule

Investment

Accommodator Rule None. Funds and investors Requires the employment of a

self-certify. Qualified Intermediary.

Geographic Limited to 8,764 census No geographic restriction

Restriction tracts, most of which are
“low-income”
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Appendix: The Best Opportunity Zone

Resources To Learn More
● OZ Insiders – The premier private community for Opportunity Zone professionals
and investors. Join today to connect to OZ industry leaders who can guide you on
your OZ journey.

● The Opportunity Zones Podcast — New episodes every week featuring interviews
with industry leading guests. Stay up to date on the latest marketplace,
regulatory, and legislative developments.

● OZ Pitch Day — A live online event for accredited investors with capital gains
seeking passive investment opportunities into Qualified Opportunity Funds that
are raising capital. We host this event three times annually. And when you attend,
you’ll get to compare pitches from several top OZ funds.

● List of Qualified Opportunity Funds — A curated list of Opportunity Zone funds

that are currently raising capital from investors. Use the filtering options to find a
fund that may be right for you.

● Opportunity Zones Map — Is your real estate located in a Qualified Opportunity

Zone? Find out by using this interactive map. Enter any address, or zoom in and
pan around manually.

● List of Opportunity Zones by State — A complete list of all 8,764 census tracts
designated as Qualified Opportunity Zones, listed by county and state. Includes
demographic data.

● IRS Opportunity Zone FAQs – An official collection of frequently asked questions

about Opportunity Zones published by the Internal Revenue Service.

● Novogradac Opportunity Zones Resource Center – A source for updates on the

OZ program from accounting firm Novogradac.

● EIG Opportunity Zone Resources – State-specific OZ resources and more.

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