Entrepreneurs have a chance to turn an economy around. However, sometimes this is hindered by the high taxes they must pay the authorities. But it's easier to achieve this if one invests in economically distressed areas. According to the Tax Cuts and Jobs Act, entrepreneurs can waive their capital gains taxes by reinvesting them in qualified opportunity zones. But, before getting deeper, it's important to know what an opportunity zone fund is.

What is a qualified opportunity fund(QOF)?

It means driving business and real estate investment in a country's economically distressed or low-income areas. The federal government encourages entrepreneurs to invest in these funds by offering preferential tax treatment on capital gains. Entrepreneurs can then reinvest the realized gains into opportunity zone funds to defer taxes they owe on their gains. It can then, in turn, greatly lower their tax bill as they grow in business. So what happens to the money pulled into the funds from entrepreneurs or investors?

What's the money used for once in the fund?

Qualified opportunity zone funds get money from investors to buy properties within opportunity zones. After buying, the fund must ensure they make improvements within 30 months since its purchase. For instance, if they purchase a building at $2 million, they have 30 months to make improvements of a minimum of $2 million.

The government hopes to drive economic growth by encouraging investment in opportunity zones. Ways they want to do it through business activities, job creation, and expanded housing alternatives. Although not sure if this will work efficiently, in 2019, qualified opportunity zone funds raised a huge amount of money. As per assessment by experts, money is capable of helping people from poverty to self-efficiency, lowering poverty.

Most investors might not understand qualified opportunity funds. But if they have the reasons why it's important, they might consider getting into them. So, why should you consider investing?

Reasons to invest in qualified opportunity funds?

As an investor, sometimes you might sell an asset and get large capital gains tax liability. On the other hand, you might want to get rid of an investment, but the capital gains tax consequences hinder you. But you can roll the capital gains into a QOF, allowing you to defer and lower your capital gain tax liability. It will enable you to diversify and positively impact your investment. What major tax benefits will you enjoy when you opt to do this?

1. You get to delay paying taxes on your primary capital gain until the tax year 2026. This means you won't pay taxes until you file your 2026 tax return 2027.
2. Investing in QOFs, the longer you hold your investment, the greater your general tax benefit.

For example:

• When you keep an investment for more than 5 years, your cost basis increases by 10%. It exempts you from paying taxes on 10% of realized capital gain.
• When you hold the investment for more than 7 years, your cost basis goes up by an extra 5%. THerefore, your capital gains tax exclusion will be 15%.
• If it extends to 10 years, you will owe no capital gains on any extra appreciation beyond what you paid in 2027.

Opportunity zone funds can be very beneficial to investors, the government, and the population in general. When the funds are pooled together, they buy assets that contribute to job creation, helping lower poverty. In addition, the investments will enable the distressed areas and surrounding to grow economically, contributing to boosting a country's revenue.