Opportunity Zones – Understanding the Basics


The Tax Cuts and Jobs Act of 2017 established the Opportunity Zone program, which encourages private investment in troubled towns while providing large tax incentives to investors. Investors who invest in Qualified Opportunity Zone funds can delay capital gains taxes.

The funds are investment entities that submit federal income tax returns as partnerships or corporations. They must put at least 90% of their money into Qualified Opportunity Zone real estate.

What Is an Opportunity Zone?

The Tax Cuts and Jobs Act established the Opportunity Zone program to promote private investment in low-income communities nationwide. The law provides a significant tax benefit for investors who invest capital gains in Opportunity Zones businesses or property.

The zones are designated by state governments and certified by the Treasury Department based on census tract boundaries. They are intended to promote economic development in areas with lower household incomes, higher poverty rates or higher unemployment rates than the surrounding area.

Investors can defer taxes on any appreciated capital gain by investing that money into a Qualified Opportunity Fund within 180 days of the asset’s sale or exchange. The opportunity fund must be an entity that files a partnership or corporate federal tax return and is organized to invest in Qualified Opportunity Zone property.

An investor can start an opportunity fund or invest in one already in place if it owns at least 90% of its assets in qualifying Opportunity Zone property. The investor can then defer capital gains tax liability on the original investment and receive a 10% tax reduction on any gains from the fund’s investment if held for ten years.

What Is a Qualified Opportunity Fund?

qualified opportunity fund is an investment entity that files a federal income tax return as a partnership or corporation and is set up to invest in Qualified Opportunity Zone real estate. Its assets must consist of at least 90% QOZ real estate.

This program was established by the Tax Cuts and Jobs Act of 2017 to support economic growth in low-income regions while also providing tax breaks to investors. Investors can receive a tax break by investing their realized capital gains in an opportunity zone fund within 180 days of gaining them. This is the main incentive. Investors can also benefit from tax-free gains on the investments if they hold them for ten years or more.

While the incentives are attractive, investors should consider all risks and consult their tax, legal, and investment advisors. Opportunity zone investments are inherently speculative and could lose value. This is only suitable for some investors. Investors should also be aware that there is a potential for loss of the initial investment, which could erode or negate any tax benefits.

What Is a Qualified Opportunity Zone Business?

The opportunity zones program is a government incentive that provides tax breaks to investors who invest in economically challenged districts. Investors can postpone paying capital gains tax for up to 9 years if they invest their unrealized capital gains in Qualified Opportunity Funds that invest at least 90% of their assets in Qualified Opportunity Zone properties and enterprises.

A QOF must have at least 90% of its assets in qualified opportunity zone property, including suitable opportunity zone stock or partnership interests, tangible property used in a trade or business located in a qualified opportunity zone, or ownership interest in an entity with such property.

To qualify for these tax benefits, a QOF must self-certify by completing a form that the IRS is expected to release later this summer. Real estate developers and other businesses seeking capital can either establish their qualifying entities or engage established QOFs looking for projects in which to invest.

What Is a Qualified Opportunity Zone Property?

Opportunity Zones are a new community development program created by the Tax Cuts and Jobs Act of 2017. The federal incentive encourages long-term investment in low-income communities by giving investors significant tax benefits for investing capital gains in qualifying opportunities.

Investors can defer paying taxes on realized capital gains if they invest the proceeds into a Qualified Opportunity Fund (QOF) within 180 days of the sale or exchange of the property that triggers the gain. The QOF must then invest the funds in Opportunity Zone property, which includes the original use of the gain or a substantial improvement to that actual use.

There are currently 8,741 designated Opportunity Zones across the country, with a map on the U.S. Treasury Department’s website. The opportunity zones are in all 50 states, Washington, D.C., and five territories. A community must be nominated by the state and certified by the Treasury Department to be considered an Opportunity Zone. Not all areas automatically qualify for this designation.