Investment Funds and Opportunity Zones: Maximizing Tax Benefits and Preserving Flexibility

This CLE course will examine the tax and operational issues counsel must consider when structuring a qualified opportunity fund (QOF) for investment in a qualified opportunity zone (QOZ). The panel discussion will include the tax ramifications of capital structure, advantages of using a portfolio company vs. a one-off entity to make investments, exit strategies, and how to use sister companies to make investments outside an opportunity zone.

Tax reform created a new capital gains deferral and an exemption for taxpayers who make long-term investments in QOZs. The centerpiece of the legislation is a new type of investment vehicle called a QOF. Fund counsel must have a firm grasp of the structural nuances that can significantly affect a QOF's operations and tax liability.

A QOF must decide whether to invest in a QOZ business or property directly or hold its QOZ business through a subsidiary. Any business that aspires to either grow outside an opportunity zone or locate facilities (offices, factories, or warehouses) outside the zone must adopt a flexible entity structure.

Exiting a QOF investment requires meticulous planning. The QOZ tax exemption is only available if an investor sells its interest in the QOF. For a QOF organized as a partnership (most QOFs), the exemption does not apply when the QOF sells a QOF subsidiary or any other assets it owns or when the QOF or a subsidiary sells its assets.

Neither the Biden administration nor the current Congress is likely to make significant changes to the QOZ program. Still, they could add a reporting requirement for QOFs to demonstrate how their investments benefit their related QOZs. Tax law changes might include raising capital gains tax rates and elimination of Section 1031 exchanges, both of which could drive more investment in QOFs and QOZs.

Listen as our authoritative panel discusses these and other structural concerns with QOFs. The panel discussion will include allowing flexibility in operations, investment, and exit strategy while preserving the tax benefits intended under this new tax exemption.