Investing in Qualified Opportunity Zones (QOZs) is an impactful capital gains tax-mitigation strategy available to investors. Passed as part of the Tax Cuts and Jobs Act of 2017, QOZs are land tracts designated by the U.S. Treasury Department and Internal Revenue Service to incentivize private investment, typically real estate development, in historically underinvested communities in order to spur economic growth and job creation, while providing tax benefits to investors who make qualified long-term investments in these zones.
With QOZs, you essentially put your capital gains back to work by seeking to defer taxes owed on them until the payment of 2026 taxes. The most financially significant Opportunity Zone tax benefit is that you may avoid any taxes on QOZ investment gains upon a sale after 10 years.
However, we believe qualified investors should be considering how to maximize these QOZ tax benefits in 2024 for two big reasons:
1. Expiration Date: When do Opportunity Zones expire?
First, the current QOZ program is set to sunset, or expire, on Dec. 31, 2026, which suggests investors may not have the ability to contribute qualified gains into a QOZ fund after this date. While there have been various proposals to extend / amend the current QOZ legislation, nothing has been approved yet. Unless Congress acts, the opportunity to seize on the potential for capital gains tax deferral and tax-free growth on the investments offered by QOZs will be no more. If the program is extended, as many believe it will be, there is still no guarantee that these tax benefits would remain the same.
2. Opportunity Zone Investments: If you’re waiting for a possible extension of the QOZ program, you may not like the new zones
Second, if the QOZ program is renewed, Congress may significantly revamp and redraw the 8,700+ zones that are eligible for investments. In fact, Congress currently has a proposal to extend the QOZ program that would make many new zones potentially less attractive for investors. Many of the existing zones are in areas, originally part of the QOZ program due to being considered “distressed” or “areas in transition,” have received significant investment already.
Again, with these unknowns in mind, the time for qualified investors to consider this investment gains tax strategy that is QOZs is here. We believe this program, unlike any other opportunities before it, is a once in a generation investment that will continue to affect economic development across the U.S.
Contact us to learn more about investing in QOZs.
Disclosures:
An investment in a QOZ fund (“the Fund”) will involve a high degree of risk and is suitable only for investors that have no immediate need for liquidity of the amount invested and can withstand a loss of their entire investment in the Fund. When analyzing an investment in the Fund, prospective investors should consider, without limitation, the following risks, and should also carefully review the more thorough discussion of risk factors and potential conflicts of interest contained within the Fund Documents (defined below).
No Assurance of Investment Return; Possible Loss of Entire Investment
Specified Investments; Lack of Diversification
Specified Investments; Lack of Diversification. The Fund’s investments will be limited meaning that an investment in the Fund would provide limited diversification. An adverse change in, loss to, or failure to consummate one or more of the identified investments could have a material adverse effect on the Fund.
Tax Risks – Opportunity Zone Provisions
Tax Risks – Opportunity Zone Provisions. The Fund was formed for the purpose of benefiting from the QOZ program, and presently intends to conduct its operations so that it is treated as a QOF within the meaning of Subchapter Z of the U.S. Internal Revenue Code. However, no assurances can be provided that the Fund will qualify as a QOZ or that, even if it does qualify, the tax benefits related to the QOF program will be available to any particular investor in the Fund. In addition, complying with QOF regulations could have a material adverse effect on the Fund’s performance. The Fund may change its acquisition program, its strategies, and the investments or types of investments it may make at any time and from time to time in order to comply with any additional legislation or administrative guidance from Congress or the Treasury.
QOZ funds cannot assure that it will be able to choose, make and realize investments in any particular asset or portfolio of assets. Similarly, there can be no assurance that the Fund overall will be able to generate returns for its investors or that the returns will be commensurate with the risks of investing in the types of assets the Fund will be targeting. There can be no assurance that any investor will receive any distribution from the Fund. Accordingly, an investment in the Fund should only be considered by persons who can afford a loss of their entire investment.
Lack of Liquidity
An investment in the Fund will be highly illiquid and requires a long-term commitment, with no certainty of return. Cresset anticipates a long time period between the initial capitalization of the Fund and the time when the Fund’s investors may receive distributions, if any. Additionally, the types of assets in which the Fund intends to invest are illiquid and will remain so for an indefinite period. Depending on market activity, volatility, applicable laws and other factors, the Fund may not be able to promptly liquidate its investments at an attractive price or at all. The sale of any such investments may be subject to delays and additional costs and may be possible only at substantial discounts.
Real estate investments are subject to some degree of risk. For example, real estate investments are relatively illiquid and, therefore, may tend to limit the Fund’s ability to promptly adjust the Fund’s portfolio in response to changes in economic or other conditions. No assurances can be given that the fair market value of any real estate investments held by the Fund will not decrease in the future or that the Fund will recognize full value for any investment that the Fund is required to sell for liquidity reasons. Other risks include changes in zoning, building, environmental and other governmental laws, changes in operating expenses, changes in real estate tax rates, changes in interest rates and changes in the availability, costs and terms of mortgage funds, energy prices, changes in the relative popularity of properties, the ongoing need for capital improvements, cash flow risks, construction risks, as well as natural catastrophes, acts of war, terrorism, civil unrest, uninsurable losses and other factors beyond the control of the Fund or the management team.
