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One year after a global lockdown triggered by the COVID-19 outbreak, the United States federal government has continued to be supportive towards stimulating the economy through aids for eligible businesses, schools and towards vaccine production and distribution. The pandemic has kept a lot of investors on their toes due to an increase in market volatility. Coupled with these happenings, there have been various speculations on the impact of the new Biden administration policies–– which officially began on January 20, 2020, on the economy.

If you invest in real estate through Qualified Opportunity Zone Funds (QOZF) or thinking to invest in Qualified Opportunity Funds (QOFs), you would most likely be concerned about how the recent economic situation would impact your returns, taxes and investment opportunities.

Basic Requirements for QOF investments

The 2017 Tax Cuts and Jobs Act (TCJA) provided an opportunity for investors to contribute towards developing economically distressed communities through Qualified Opportunity Zone (QOZ) investment opportunities. Generally, these communities are nominated by a state, the District of Columbia, or a U.S. territory. Some basic requirements for investments through qualified opportunity zone funds and qualified opportunity zone businesses are :

180-Day Investment Requirement for QOF Investors

This requirement mandates taxpayers to invest gains from property sale in a QOF within a 180-day window starting from the date of the sale or exchange in order to qualify for capital gains tax deferral provided that the gain does not exceed the aggregate amount invested by the taxpayer in the Qualified Opportunity Fund. 

30-Month Substantial Improvement Period for QOFs

For a tangible property to qualify as an opportunity zone business property, it has to be used in a trade or business of the QOF and satisfy the substantial improvement requirement. This requirement provides that the original use of tangible property in the qualified opportunity zone acquired after 2017 must begin with the QOF or the QOF must substantially improve that property. Meeting the substantial improvement requirement is contingent on the additions to basis –– with respect to the qualified opportunity fund property –– held by the QOF during any 30-month period beginning after the date of acquisition, exceeding the adjusted basis of that property at any period starting from the 30-month substantial improvement period.

90-Percent Investment Standard for QOFs

A QOF as an investment vehicle could be a corporation or a partnership for the purpose of investing in qualified opportunity zone property and not another QOF. The ninety-percent investment standard requires a QOF to hold at least 90 percent of its assets in qualified opportunity zone property.

The average percentages of the QOF’s qualified opportunity zone property on the semi-annual testing dates must equal at least 90 percent of the QOF’s assets. If a QOF fails to meet this requirement and the average of the percentages of its qualified opportunity zone property on the testing dates does not equal at least 90 percent of the QOF’s assets, they would be subject to a penalty for each month it fails the requirement. If the failure is due to a reasonable cause, the penalty may not be imposed.

Working Capital Safe Harbor for Qualified Opportunity Zone Businesses 

For Qualified Opportunity Zone Businesses (QOZB), there is a requirement to have less than five percent of the average of the properties aggregate unadjusted bases attributable to non-qualified financial property excluding some certain working capital assets such as cash and cash equivalents from non-qualified financial property or reasonable amounts of working capital that are held in cash, cash equivalents, or debt instruments with a term of 18 months or less. 

A working capital safe harbor was provided for QOZBs to allow for treating certain amounts of working capital as reasonable provided certain requirements are met. Through a written schedule, a QOZB  can be allowed to utilize the expenditure of the working capital assets within 31 months of receiving the assets.

However, the working capital safe harbor period can be extended to a maximum 62-month period for certain reasons such as, if the qualified opportunity zone business is in a qualified opportunity zone within a federally declared disaster. Then, the qualified opportunity zone business may have additional time to a maximum of 24 months to use its working capital assets, subject to meeting the working capital safe harbor requirements. Given this, a qualified opportunity zone business located in a qualified opportunity zone, within a federally declared disaster, may have up to a maximum 86-months to expend reasonable working capital assets.

12-Month Reinvestment Period for QOFs

Selling off or disposing some or all of the qualified opportunity zone property in a QOF would result in proceeds or possible capital gains. If some or all of the proceeds in qualified opportunity zone property is invested by the QOF by the last day of the 12-month period from the date of the sale, or disposition, the reinvested proceeds can be treated as qualified opportunity zone property towards fulfilling the ninety-percent investment standard. This also applies if there is a distribution of the QOF’s qualified opportunity zone stock that qualifies as a return of capital.

However, there are requirements that need to be met for this treatment to be applicable in QOFs. The period before the proceeds from the sale, disposition or distribution is reinvested in qualified opportunity zone property, they have to be continuously held in cash, cash equivalents, or debt instruments with a term of 18 months or less. If any reinvestment plans in a qualified opportunity zone property is delayed as a result of a federally declared disaster, the QOF may get additional time up to a maximum of 12 months to reinvest the proceeds, subject to the QOF sticking to  the original investment plan. 

What’s new for investments in Qualified Opportunity Funds and Qualified Opportunity Zone Businesses

In response to the difficulties faced by many investors, the Internal Revenue Service (IRS) released the Notice 2021-10 on January 20, 2021. This release extended the relief for QOFs and their investors initially provided by Notice 2020-39 and also provided additional relief to help navigate around the requirements for the QOFs. The relief extensions are automatic and investors are not required to process any documentation.

180-Day Investment Requirement for QOFs

The released Notice 2021-10 provided an extension for the 180-day investment window for QOF investors until March 31, 2021. This enabled investors who had the last day of the 180-day window to invest their eligible gains from sale proceeds fall between any time from April 1, 2020, through March 31, 2021 have the opportunity to still invest in QOFs. Although this relief is automatic, as an investor in QOFs, you will be expected to make a valid deferral election on your federal income tax return –– including extensions, for the applicable tax year that the gain is expected to be recognized.

30-Month Substantial Improvement Period for QOFs and Qualified Opportunity Zone Businesses

As regards the 30-month substantial improvement period, If you hold a QOF property or qualified opportunity zone business property, the Notice 2021-10 relief allows that the period from April 1, 2020, and March 31, 2021 be disregarded in determining any 30-month substantial improvement period.

With the substantial improvement requirement, investors in QOFs are required to make improvements on a QOF property that increase their adjusted tax basis in the improved property within a 30-month window. The  Notice 2021-10 relief essentially provides more time for investors to improve their QOF property and qualify for possible tax benefits. 

90-Percent Investment Standard for QOFs

Under Notice 2021-10, if an investment in QOF has the last day of the first six-month period of a taxable year or the last day of a taxable year fall between the period of April 1, 2020, and June 30, 2021, failure by the QOF to satisfy the ninety-percent investment requirement for the applicable tax year is considered to be from a reasonable cause. This relief is also automatic and requires that the QOF fill all lines on Form 8996 completely with respect to each affected taxable year. The completed Form 8996 would need to be filed with the federal income tax return (including extensions) for the affected taxable year(s).

Working Capital Safe Harbor for Qualified Opportunity Zone Businesses

The Notice 2021-10 relief provides that Qualified Opportunity Zone Businesses with working capital assets that are planned to be covered by the working capital safe harbor before June 30, 2021, receive not more than an additional 24 months. This extension includes any relief provided under the previously provided relief in Notice 2020-39 and allows for a maximum safe harbor period up to 55 months and in the case of start-up businesses, up to 86 months subject to the requirements of the working capital safe harbor.

12-Month Reinvestment Period for QOFs

Following the existing 12-month reinvestment period requirement, if your investment in qualified opportunity funds has a 12-month reinvestment period that includes June 30, 2020, your QOFs would receive not more than an additional 12 months (including any relief provided under Notice 2020-39). This essentially means a combined maximum reinvestment period of not more than 24 months to reinvest some or all of the proceeds received by the QOF either in the form of a return of capital or the sale or disposition of some or all of any qualified opportunity zone property, in qualified opportunity zone property. The condition that the QOF invests the proceeds in the manner originally intended before June 30, 2020 still applies. 

In conclusion

These changes and updates for investments in QOFs may seem like a lot to process and implement, therefore it is advisable to employ the services of professional tax experts and accountants to provide clarity and more information that make it possible to maximize any potential tax benefits and opportunities.

Contact the Stax Capital team for more information on investments in qualified opportunity zone funds and businesses.

An alternative option that can be explored by real estate investors looking to diversify their portfolio and take advantage of possible tax benefits is the Qualified Opportunity Zone investment opportunity. Here are some of the important things to know about investing in Qualified Opportunity Zones through Qualified Opportunity Funds.

What is a Qualified Opportunity Zone?

The 2017 Tax Cuts and Jobs Act (TCJA) brought about the Qualified Opportunity Zone (QOZ) investment opportunity to encourage capital investments in economically distressed communities. These communities are usually nominated by a state, the District of Columbia, or a U.S. territory.

Qualified Opportunity Zones can be found in all 50 states, the District of Columbia, and 5 United States territories. The Internal Revenue Service (IRS) provides a list of the locations classified as QOZs.

The capital investments in these zones are expected to boost economic development and spur up economic activities. As an investor, you are not required to live in these specified zones, you only need to invest eligible gains in the QOZs and elect for tax deferral benefits.

What are Qualified Opportunity Funds?

Qualified Opportunity Funds (QOFs)are investment vehicles set up solely for investing in Qualified Opportunity Zones. Investments in Qualified Opportunity Zones through Qualified opportunity Funds may be eligible for tax benefits. If you invest eligible gains in Qualified Opportunity Zones, you may be able to defer taxes on these gains.

You can make cash and non-cash investments such as property in a QOF, however, only qualifying investments may be eligible for tax deferral. In the case of property investment, the tax deferral would be limited to the basis of the property.

Qualified Opportunity Funds can be eligible partnerships or corporations or Limited Liability Companies (LLCs) set up to operate as partnerships or corporations with respect to federal income tax as long as they are set up for substantial investment in QOZ properties. To qualify as a QOF, 90% of the eligible entities’ assets should be in Qualified Opportunity Zone property.

What are the eligible QOZ properties?

An eligible QOZ property can be either of the following:

A qualified ownership interest held by Qualified Opportunity Funds in a partnership or corporation operating as a QOZ business (a Qualified Opportunity Zone stock) or,

Eligible Qualified Opportunity Funds’ tangible property utilized for business in a QOZ.

The properties for Qualified Opportunity Funds or qualifying ownership interest in a QOZ corporation or partnership have to be purchased after December 31, 2017. Also, the qualifying ownership interest has to be acquired with cash exchange.

In order to qualify as a tangible Qualified Opportunity Zone business property, the property has to either be used by the Qualified Opportunity Fund or QOZ business for trade or business purposes. Additionally, the property’s original use should have started with the Qualified Opportunity Zone business or QOF or it was substantially improved and used substantially for the Qualified Opportunity Fund or QOZ business purposes.

Certain entertainment properties and businesses located in QOZ such as clubs, liquor stores gambling facilities etc. may not qualify for Qualified Opportunity Funds’ investments.

What is the Qualified Opportunity Fund Tax Benefit?

The benefit received on a QOF qualified investment depends on the time period with which it is held. The increase in the Qualified Opportunity Fund basis gets higher the longer you keep your investment.

For example, the basis for a QOF investment held for at least five years increases by ten percent of the deferred gain, the basis increases even further by an additional five percent if held longer, for at least seven years.

If you decide to dispose of your interest in a QOF after 10 Years and you opt to increase its basis to the fair market value on the date of disposal, you may be eligible for permanent gain exclusion on the sale or exchange.

Rules for QOF Tax Deferral Benefit

Eligible gains which include capital gains need to be invested within a given time period for gains to qualify for tax deferral. Also, these gains need to be invested for equity interest Qualified Opportunity Funds. Eligible gains from property sale qualify for deferral, given that they are invested in a QOF within the 180-day period from when the gain was made.

To elect to defer your capital gain, you do this through your federal income tax return. Eligible tax deferral of qualifying QOF investments is valid until the earliest of an inclusion event or until December 31, 2026.

An inclusion event for your qualifying investment in a QOF refers to situations when you terminate or reduce your investment by selling it or gifting it or through a liquidation of the Qualified Opportunity Fund.

When you decide to reduce or terminate your investment in Qualified Opportunity Funds, you would need to report the deferred gain on your tax return. This deferred gain at the time of inclusion would be determined by taking the lesser of your deferred gain or the QOF Investment’s fair market value and subtracting the basis in the Qualified Opportunity Fund Investment.

You also need to report any gain or loss on the disposal of your QOF investment. The gain or loss can be determined through the basis in the Qualified Opportunity Fund investment.

Pros of Qualified Opportunity Funds

The benefits of investing in Qualified Opportunity Funds include:

Impact Investment Opportunity: Investing in Qualified Opportunity Funds may be attractive to investors passionate about making social and economic impact in their environment as QOFs target economic development in distressed communities.

Flexibility on eligible gains: The gains to be invested in a QOF for tax benefits are not restricted to capital gains from property sale. Eligible gains could also include gains from investments such as stocks or bonds.

Investment portfolio diversification: Accredited investors looking to diversify their portfolio can utilize the QOF vehicle.

Capital gain deferral: Eligible capital gains such as gains from property sale can be deferred if reinvested in a Qualified Opportunity Fund.

Capital gain reduction: The step-up basis for investment in Qualified Opportunity Fund allows you to reduce capital gain recognized on your interest in the QOF when sold or exchanged after at least five years of holding it.

Capital gain elimination: Capital gains of qualified investments in a Qualified Opportunity Fund may be eligible for total tax elimination when held for at least 10 years.

Cons of Qualified Opportunity Funds

Illiquid investment: Property investments through Qualified Opportunity Funds are relatively illiquid as there are no public markets for these alternative investment types. Interests in QOF may take significant time to sell than traditional investment types such as shares and bonds.

Time bound benefits: To access the majority of the tax benefits from investing in Qualified Opportunity Funds, you need to meet the time limits required. This kind of investment may be suitable for only long-term investors.

Also, the December 31, 2026 timeline for tax benefits means to be eligible for the seven-year 15% basis increase, an investment in a QOF must have been made by December 31, 2019.

 Gains not guaranteed: As with other types of investments, there is no guarantee for gains on properties invested through a QOF either through returns or capital appreciation.

Legal risks: There could be changes to laws and requirements for tax benefits as regards investments in Qualified Opportunity Funds. There is therefore no certainty on any changes or extension of these benefits’ deadline dates or requirements.

Non-qualifying investment: Making transfers or gifting your qualified investments in a QOF signifies an inclusion event and makes the investment non-qualified in the hands of the new owner. You would have to recognize any gains for tax purposes when this occurs.

How to Invest in Qualified Opportunity Funds

As a taxpayer, you would need to meet the 180-days rule by investing any capital gains within 180 days when your investment was sold, and gains realized. To ensure that you meet this requirement, it is recommended to locate a QOF opportunity beforehand and make all the necessary research and inquiries.

Investing in Qualified Opportunity Funds usually involves complex processes and requires significant investment knowledge, hence you may need the professional services of a chartered professional accountant or a tax expert. This helps you understand the underlying benefits as well as the risks involved.

You could set up your own QOF or invest through established Qualified Opportunity Funds. Established Qualified Opportunity Funds provided by investment firms would generally have an investment agreement specifying liabilities, rights and obligations, also they usually have requirements on minimum investment amounts and sizes. Also, these investment opportunities may only be available to accredited investors.

The QOF you choose to invest in would manage your investments and provide any periodic returns based on the portion of your investment and any other specifications outlined in your investment agreement.

Conclusion on QOFs

Qualified Opportunity Funds provide an alternative means of investing and diversifying through real estate property in Qualified Opportunity Zones. Qualifying investments in QOZ attract tax benefits, you can take advantage of these benefits if the necessary requirements are met.

Stax Capital specializes in providing access to Qualified Opportunity Funds. Our experience coupled with our effective investment strategies can help you access potential benefits through QOF investments. Find out more about our offerings on Qualified Opportunity Funds.

The main goal of investing is to earn returns. No investor really looks forward to investments that yield losses and even if such an investor exists, that would not be the norm. However, in reality, losses occur; economies experience downturns and stock prices dip.

How then can you protect yourself from making losses on your investments? While you cannot control the direction of the financial markets or investment prices and returns, you can mitigate against investment risks by diversifying your investment portfolio. One of such ways is through real estate investment.

Even the best diversification strategy does not guarantee a hundred percent protection against total investment losses, however, investment diversification may reduce losses and cushion the impact of any loss experienced by some assets in your portfolio.

What is investment diversification?

Financial markets are volatile and dependent on a lot of factors such as government policies, politics, interest rates, inflation rates, economic cycles and much more. While there are expectations of profits and returns, the uncertainty in investment performance still remains.

Investment diversification is the risk management strategy geared towards mitigating and reducing losses due to market uncertainties and fluctuations by having a diversified portfolio of assets.

For example, if you put all your investments into just one company’s stock, you stand a chance of losing some or all of your money if the company makes losses or goes bankrupt.

Investment diversification in this scenario would mean you making the decision to invest in multiple company stocks so that if one company’s stock value falls and causes you to lose money, your investment in the other companies may not lose value and even yield returns.

Your investment diversification strategy may even include investing in different financial markets and across different industries.

How do you go about diversifying your investment portfolio?

If you want to diversify your investments and broaden your portfolio you may begin by investing in multiple company stocks, exploring alternative assets like real estate, including fixed income assets like bonds or government bills into your asset allocation or buying into commodities.

Diversifying your portfolio doesn’t just mean buying into any and every available stock, fund, bond, property or investment vehicle, it should involve careful consideration of what your financial expectations are, and it should also depend on your investment objectives.

The asset allocation you choose should reflect your risk appetite, expected returns, length or period of investment and your financial status.

If you have little to no knowledge about how these investment assets work, it is recommended to use the services of experienced professionals who advise you on how best to spread your assets in your investment portfolio according to your risk appetite and return expectations.

What are the benefits of investment diversification?

When you diversify your investment portfolio, you may limit the exposure to losses and the risk of eroding your entire investment principal or any returns you may have made and re-invested.

If you spread your investments across different company stocks or even across different classes of assets such as bonds, commodities or real estate, the chances of you losing all your money across all investment platforms are low. Also, high returns in certain investment assets can offset the losses made in other assets.

Here are a few reasons why you may choose investment diversification:

You want to manage your exposure to investment risks and losses

You want to take advantage of different investment return opportunities

You want investments with different levels of liquidity or maturity

You want to participate across different financial markets and assets

Diversification may indeed help you make the best out of your investments. It is a strategy that may help manage your portfolio and cushion effects of market fluctuations or potential losses.

What investment diversification options exist?

 You can diversify your investments across different asset types and classes. Investment diversification may also be across different countries, terms to maturity, liquidity etc.

Investing in some assets may prove an aggressive growth strategy, they may yield higher returns but in turn have greater risks, on the other hand, some investment assets are more conservative in terms of returns but may be less risky.

Depending on your risk appetite, you can either have a mix of growth and conservative investment assets. An investor with higher risk appetite would most likely invest in more aggressive assets that are expected to yield higher returns even though risky.

You may choose to diversify and invest within or across different financial markets such as: money market, stock market, fixed income market, commodity markets, real estate market.

You can choose to invest across local and international financial markets to diversify and prevent country specific risks. Your portfolio may include a mix of short-term to long-term investments or a mix of fixed income and variable returns investment assets.

Your diversified portfolio can also be spread across different types of funds such as mutual funds, exchange traded funds (ETFs) or real estate funds and trusts. There are a lot of investment diversification options to explore.

 Diversification through real estate investment

The real estate market provides an alternative investment path other than a conventional equity investment or bond investment. Similar to other financial markets, returns are not guaranteed and there could be risks involved.

However, investing in real estate may be a good way to diversify your investment portfolio. The real estate market offers opportunities to invest in either residential or commercial properties or through real estate trusts, funds and programs.

Real estate investments paired with other asset classes can provide an avenue to have a balanced portfolio that mitigates against extreme losses while pursuing returns and capital gains.

If you choose to diversify your investment portfolio through the real estate market, you can do so by: buying properties directly, investing in a real estate trust or fund such as a Real Estate Investment Trust (REIT), the Delaware Statutory Trusts or buying into a real estate program.

Including real estate in your asset allocation is definitely an option to diversify your investment portfolio but you need to be aware of the fact that it is not as liquid as other conventional assets such as stocks and bonds.

 Choosing a real estate investment partner

In real estate investing, as with other investments, you need to be knowledgeable about the possibilities, risks, opportunities and returns as well as the methodology involved.

Investing in properties requires a high level of expertise or professionalism in order to take advantage of opportunities or maximize returns where applicable.

When choosing a real estate investment company to partner with, it is advisable to consider the following:

A reputable real estate investment company has the required expertise to explain property investment options, carry out adequate due diligence and efficiently manage any properties under their portfolio.

Work with Stax Capital to diversify your portfolio through real estate investment

The Stax Capital team is made up of highly experienced professionals who are committed to assisting you achieve financial freedom through your real estate investment portfolio.

Stax capital provides opportunities in real estate investment through the following investment vehicles:

Delaware Statutory Trusts:

If you want to take advantage of the 1031 exchange and effectively manage your real estate investment returns, Stax capital offers investment opportunities through Delaware Statutory Trusts (DSTs).

DSTs are an attractive channel for real estate investment, they can provide an advantage for deferring capital tax gains through the 1031 exchange for like-kind investments.

Real estate investing through DSTs, while promising, involves complexities and intricacies that can best be managed by professionals such as the Stax Capital team.

If you are looking to make real estate investment into a like-kind property or own fractional ownership in real estate properties, you can explore the Delaware Statutory Trusts managed by Stax Capital. As an investor looking to diversify your investment portfolio, get access to the possibilities and flexibility offered by the real estate market.

Qualified Opportunity Funds:

Another avenue to take advantage of tax incentives through real estate investment is through Qualified Opportunity Funds (QOFs).

Partner with Stax Capital to help you strategize on real estate investment channels through QOFs based on real estate in Qualified Opportunity Zones (QOZs). As professionals, we help you explore and plug into the advantages of deferring, reducing or even eliminating property capital gains tax.

Direct Participation Programs:

With over a decade of being involved with Direct Participation Programs (DPPs), The Stax Capital team operates with due diligence and best management practices to provide various effective real estate investment platforms.

Alternative investments in real estate vehicles such as Delaware Statutory Trusts, Qualified Opportunity Funds and Direct Participation Programs provide a means for portfolio diversification.

These investment opportunities may provide potential tax advantages and/or higher investment returns, however, there are associated risks. Some of these risks include liquidity risk, dependence on professionals for decision making, and other market risks.

It is important to work with an investment partner like Stax Capital to help you understand any associated risks while helping you to take advantage of possible benefits in the real estate market.