Qualified opportunity funds: Compare and contrast direct and indirect investments

Nearly every week, there are multiple reports of new Qualified Opportunity Funds launching. Once a sleeper provision of the Tax Cuts and Jobs Act, the opportunity zone incentive has spurred a great deal of activity as of late. While we are still awaiting additional guidance from Treasury and the Internal Revenue Service, fund managers have begun to feel they have enough direction to start laying the groundwork in this new investment space.

The opportunity zone program was introduced with the intention of spurring investment in low-income communities. With over 8,700 identified qualified opportunity zones, the potential impact is significant. This program provides tax deferrals and gain exclusions for investors who place capital gains into a new investment vehicle known as a “Qualified Opportunity Fund” (QOF). A QOF is an entity that self-certifies that at least 90 percent of its assets are Qualified Opportunity Zone Property (QOZP). QOZP consists of qualified opportunity zone stock, qualified opportunity zone partnership interests, or investment into qualified opportunity zone business property (QOZBP). As a result, investments into QOZBP can be direct or indirect, and it is important to understand how the statute and proposed regulations provide different guidelines for these two strategies.