2017 Essential Tax and Wealth Planning Guide
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Tax implications of fund investing
Types of investment funds
and income tax characteristics
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Introduction
What is an investment fund?
Types of investment
funds and income tax
characteristics
• Marketable securities
Hedge funds
• Private equity/venture capital
Publicly traded partnerships
Real estate funds
.
Fund of funds
Investment fund attributes
• Trader versus investor
.
.
entities
Passive versus
non-passive income
Separately stated activity
(including PTPs)
Qualified small business
stock (QSBS)
Unrelated business
taxable income
• State tax reporting
Conclusion
Resources
Fund of funds
The term fund of funds (FOF) refers to an
investment fund with an investment strategy
designed to hold a series of underlying fund
investments versus directly owning stocks,
bonds, operating entities, and other assets.
FOFS are typically structured as LPs or LLCs.
FOF are typically organized by the type of
underlying investment funds; for example,
a hedge fund FOF, private equity FOF, real
estate FOF, or publicly traded partnership
FOF. Alternatively, it is possible for a FOF to
be setup with investments across multiple
types of investments, though this is less
common. One benefit many find with a FOF
structure is that FOFS provide access to
funds investors may not be able to invest
in directly. For example, many funds have
contribution minimums for investors. If
an investor can't meet the contribution
minimum, the investor may be able to gain
exposure to the fund by commingling its
capital with others in a FOF structure to be
able to meet the contribution minimum
and obtain access. Consideration should be
given to the additional layer of management
and performance fees at the FOF level, in
addition to the fees that are being charged
by the underlying investment funds.
Character of income
considerations-fund of funds
The tax attributes of FOF are similar to
the aforementioned investment funds.
Depending on the investments of FOFS,
it can be similar to one or more types of
investments funds.
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