Advisors who have clients with capital gains, a long time horizon and a desire to make a socially responsible investment may want to consider opportunity zone funds.
The U.S. Treasury and IRS recently issued a first set of guidelines for these investments which allow capital gains to be deferred until the investment in the fund is sold or until Dec. 31, 2026, when the tax provision sunsets, so long as the capital gains are invested within 180 days.
The investment will also receive a stepped-up basis if it’s held for five years or longer, according to the following schedule: a 10% increase in basis at five years, 15% at seven years and market price at time of sale at 10 years.
In order to qualify for these benefits, an opportunity zone fund must invest at least 90% of its assets in a business located in one of 8,700 census tracts identified as opportunity zones by the federal government, based on selections by state governors of high-need communities. The business, in turn, must retain 70% of its tangible property in the opportunity zone. As a result, a fund is only required to have 63% of its assets invested in an opportunity zone.
“The bar is pretty low,” said Justina Lai, director of impact investing at Wetherby Asset Management, an RIA with offices in San Francisco and New York, about the impact requirement for opportunity funds.
Lai has been receiving pitches from opportunity zone funds that are starting up, primarily real estate deals, although there is no requirement in the legislation or guidelines restricting investments to that category.
She’s looking at these funds’ impact and investment strategies and how they can potentially benefit low-income people. “The impact investing industry will pay close attention.”