Investors who fail to select the right opportunity zone funds could face unexpected financial headwinds.
Investors welcomed the second set of opportunity zone rules in April, which allows exits from qualified funds with a chance to take advantage of eligible tax benefits via asset sales in addition to the previously allowed equity sales. If you do an equity sale, everything in the fund is required to go with the sale, while asset sales allow a purchaser to acquire individual fund assets, McGinnis Lochridge attorney and partner Douglas Jones said. While asset sales give investors and funds another exit strategy, it isn’t always the best choice. “Even though the asset sales are allowable and you can do them, it’s a good idea in some situations to be able to preserve the ability to do an equity sale even though we have these asset rules,” Jones said. It comes down to the blend of qualifying and non-qualifying properties within a fund. “The reason the asset sales can be sort of not optimal in some situations is because the way the second set of regs reads is that only capital gains from the sale of qualifying properties [are] eligible for people to take advantage of the 10-year-hold benefit, and these funds are not going to have 100% qualifying properties,” Jones said. “They have up to 10% or sometimes up to 30% non-qualifying properties, so if you’re doing an asset sale, you’re not getting tax benefit for potentially 30% of the assets in the fund. Whereas if you did an equity sale, you would get the tax benefit related to non-qualifying assets.”
Kerri Panchuck, Bisnow Dallas Ft. Worth