But the rules are complex, and the Treasury and the Internal Revenue Service didn’t clarify many details until October; more guidance is still expected. The recent government shutdown didn’t help.
That said, opportunity funds are beginning to gain steam. The main questions for investors — such as what kind of investment gains are eligible for investment in an opportunity fund — generally have been answered, Mr. Miller said.
“The benefits are pretty significant,” Mr. Miller said.
Here’s how it works
Opportunity funds let investors postpone federal taxes on recent capital gains until the end of 2026; they can also reduce the taxable portion of those gains by as much as 15 percent, after seven years. Further, investors can eliminate taxes on additional gains from investing in the fund itself, if they hold the investment for 10 years.
So, if you have investments that have appreciated, you can defer capital gains taxes by selling the investment and reinvesting the money into an opportunity fund within six months. Almost any sort of capital gain qualifies, whether from the sale of stocks or mutual funds, or other investments, including the sale of real estate or a business. (One investor in Fundrise’s opportunity fund, Mr. Miller said, invested a gain from the sale of a dialysis clinic.)
Just the gains on an investment — rather than the entire proceeds of a sale — must be reinvested in the opportunity fund. That’s “highly unusual” and one reason opportunity funds may appear attractive, said Jeffrey Levine, chief executive of BluePrint Wealth Alliance.
Say you sold stock for $500,000, and $300,000 of it was a gain. Just $300,000 must be rolled into the opportunity fund and the remaining $200,000 can be used as the seller wishes, according to an example provided by Tim Steffen, director of advanced planning at Baird Wealth Solutions Group, part of Robert W. Baird & Company.
By putting money in the fund, investors not only delay having to pay tax, but are also eligible for a partial exclusion of the tax on the reinvested gains. If you remain in the fund for five years, you will reduce the taxable gain by 10 percent; if you hold it an additional two years, for seven total, you will further reduce the taxable gain by another 5 percent.
