Opportunity Funds are investment funds designed to encourage economic development in under-resourced communities by offering preferential tax treatments on federal capital gains.
These under-resourced communities, called Opportunity Zones, and their accompanying funds are “designed to spur economic development and job creation in distressed communities,” according to the IRS.
To encourage investment, these funds offer 3 substantial tax treatments:
- Defer payment of capital gains
- Reduce taxes on original federal capital gains by 15% after 7 years
- Pay 0 federal capital gains tax on the sale of Opportunity Fund investments after 10 years
Opportunity Zones were first designated across 18 states on April 9, 2018 as part of the Tax Cuts and Jobs Act. There are now Opportunity Zones in all 50 states.
These Opportunity Zones are determined using a variety of factors. For example, the City of Chicago recommended 133 census tracts to the state of Illinois based on the following factors:
- Unemployment rate of at least 20%
- Median family income of less than half the area median (less than $38,000)
- Poverty rate of at least 30%
An Opportunity Funds must invest at least 90% of its assets in businesses and other assets located in Opportunity Zones.