Investors can defer paying capital gains taxes on profits earned on the sale of stocks and real property by participating in a new federal program that promotes investment in municipalities across the nation.

Created to encourage long-term investment of unrealized capital gains in low-income urban and rural communities, the Opportunity Zone Program was signed into law late last year under the Tax Cuts and Jobs Act of 2017. Under the program, investors who sell appreciated assets can invest the proceeds within 180 days of the sale into qualified opportunity funds to defer paying capital gains taxes. Three new funds started this year under the program, but they aren’t without some risks.

The IRS says a qualified opportunity fund must be set up as either a partnership or corporation to invest in eligible property in an opportunity zone and is funded with investors’ gains from prior investments.

All qualified opportunity zones (QOZ) have been nominated, certified and designated. To view a downloadable list of all QOZs and a map of designated QOZ locations, visit https://www.cdfifund.gov/Pages/Opportunity-Zones.aspx.

If the investor holds his or her investment in the fund for at least 10 years, that investor will be eligible for an increase in basis equal to the fair market value of the investment on the date that the investment is sold or exchanged. Investors in a QOZ are not required to reside there.

To become a qualified opportunity fund, an eligible taxpayer self-certifies by completing a form and attaching it to his or her federal income tax return for the taxable year. On June 26, North Coast Partners became the first investment group to launch an opportunity fund. The group's Detroit Opportunity Fund is the first of several geographically targeted opportunity funds and began with a $500 million pipeline of new deals in the city. The fund promotes investment in "innovative makers who build things in Detroit," and consists of 16 partners co-managed by Dylan Enright, founding partner of Wefunder, and Terence Reeves, a venture capital attorney and startup advisor.

Fund partners must invest a minimum of $10,000 in any approved startup venture. The fund then matches partner investments 10 to 1.

Caliber - the Wealth Development Company, based in Scottsdale, Ariz., became the second investment group to start an opportunity fund. On July 10, Caliber issued a press release announcing its new Tax Reduction Opportunity Fund. The fund will include investments in multifamily, hospitality, commercial and residential developments in downtown Phoenix, Tucson, Tempe, Scottsdale and Mesa, where median incomes fall below the national average and Caliber has a pipeline of new projects proposed for development.

Investors with Q1 2018 gains can take advantage of the offer. For details on investment options or to learn more about Caliber, visit CaliberCo.com.

Fundrise LLC, a Washington, D.C.-based crowdfunding startup, became the third investment group to start an opportunity fund, which it announced in mid-July. The group reportedly plans to raise $500 million by the end of 2019. The investments will be used for projects in census tracts throughout the United States that were recently designated opportunity zones under the new federal tax law.

For a minimum investment of $10,000, investors can defer capital gains tax until 2026 if they invest those gains in construction projects in designated opportunity zones located in metropolitan Los Angeles, Seattle, Washington, D.C., Atlanta and the San Francisco/Oakland area. 

In addition to paying $0 in capital gains on investment in its' opportunity fund, Fundrise informs potential investors that they can reduce the tax they owe by up to 15 percent after seven years.

Despite the allure of zero tax on profits earned through investment in opportunity zone projects, investors should be aware that there is also a certain amount of risk associated with the federal government's Opportunity Zone Program due to a lack of specifics in the legislative language that created it, according to a Fundrise disclaimer posted online.

"As of July 2, 2018, there is uncertainty regarding the Opportunity Zone program, as the U.S. Department of the Treasury has not released guidance on many of the questions left open by the Tax Cuts and Jobs Act of 2017," Fundrise informs potential investors. "These open questions include, but are not limited to: (a) what kinds of gains, other than capital gains, if any, can be properly rolled into an Opportunity Fund, (b) how much time an opportunity fund will have to deploy the capital it has raised, (c) tax treatment of gains in an opportunity fund pass-through partnership, etc. Given such uncertainty, each prospective investor should consult with their personal tax advisors before making any investment into an opportunity fund, including the Fundrise Opportunity Fund."