Opportunity Fund Rules Set Up Capital Gains Cash Trap

Cash-hungry investors hope to use opportunity funds as collateral for new projects, but all banks may see is a potentially risky loan.

Opportunity zone proposed regulations (REG-115420-18) allow investors to pledge their capital gain contributions as collateral for loans—a rule that ensures investors have access to operating cash. The guidelines promise potentially massive tax breaks on an estimated $6 trillion of idle capital gains that could be recycled into development projects and businesses in previously overlooked areas. But for a bank, lending against the fund is a risk because the projects aren’t ...