Ben Franklin famously shared, “In this world, nothing can be said to be certain but death and taxes.” Almost 250 years later, his words still hold water today. Like it or not, taxes are a part of life. But thanks to the 2017 Tax Cuts and Jobs Act, you can now defer and cut your capital gains tax and earn tax-free income by investing in Qualified Opportunity Zones (QOZ).
In parts one and two of our series, we covered the basics of QOZs and demonstrated the capital gains savings and tax-free earning possibilities. But exactly how can you take advantage of these benefits? QOZs offer two ways to invest: a professionally managed investment or one you structure yourself. In this final part of our series, we’ll describe both investment options, plus their pros and cons.
It’s true Qualified Opportunity Zone Funds can yield significant tax savings and earning potential. But like anything involving the IRS, QOZ Funds require attention to detail, preparing the legal documents, and filing correctly with the IRS. If you want to let someone else tackle the paperwork (and handle the headache), then you may want to consider a managed fund.
Much like investing retirement savings with a financial company such as Prudential, Fidelity, or Edward Jones, going with managed funds means you aren’t responsible for validating the QOZ fund and ensuring legal requirements. All you have to do is invest your gain, sit back, and await the tax benefits. However, it’s mission-critical to read over the policy carefully. The fine print can make a difference. For example, most managed funds have a minimum investment amount and additional holding requirements and fees.
For an extensive list of QOZ Funds accepting investors, go to
Managed Funds Pros:
- Details are taken care of for you
- Less paperwork
- Reduced margin of tax error
Managed Funds Cons:
- Minimum investment amount and fees
- Possible additional holding requirements
- Funds are usually not with a local QOZ (less local community impact)
DIY Your QOZ
If you’re looking for a hands-on approach with your QOZ investment, then you may want to structure your own fund. As a bonus, you have the freedom to select the community you wish to help build up with your investment. And with so many QOZs nationwide, it’s likely you can help revitalize a struggling community near where you work or live.
While having full control of your fund may sound appealing, be prepared to do your homework and get help from a knowledgeable professional to follow the IRS guidelines. For starters, QOZ funds must be domestic entities taxed as a corporation or partnership, and the funds must establish the intent to invest in a QOZ property.
Qualified QOZ properties are usually split into two categories: newly issued corporate stock or partnership interests and eligible business property. If you choose to invest in a business property, it’s crucial you verify that business meets all the tax requirements of a QOZ property. Also, if you want to operate your own business within the QOZ, be prepared to adhere to the complicated tax code requirements for your business to qualify for the program’s tax incentives.
One final tax tip: you can self-certify your fund by attaching Form 8996 to your IRS tax return. On the form, you’ll need to show that 90% of the fund assets are for QOZ property.
- More control over the fund’s details
- You can choose the community (keep it local)
- No managed fund fees or rules
- Must verify QOZ property
- Strict IRS guidelines, requirements, and paperwork
- Special considerations to operate your business within the QOZ
Whether you’re thinking of investing with a managed fund or structuring your own, it’s crucial you get all the facts before deciding what’s right for you. At BB&C, we can help you structure a fund and provide Opportunity Zone guidance.
Reach out to Kyle Mandeville at 765-742-9068 to get started today.
The content of this blog is intended to be general and informational in nature. It is advertising material and is not intended to be, nor is it, legal advice to or for any particular person, case, or circumstance. Each situation is different, and you should consult an attorney if you have any questions about your situation.