The Opportunity Zone Program was established as part of the 2018 Tax Cuts and Jobs Act to encourage economic growth and investment in designated low-income and distressed communities. Qualified opportunity zones cover zip codes or other geographic areas determined by each state. Investments made within these areas qualify for certain significant tax breaks including reducing and possibly even eliminating taxes on capital gains.
What is a Qualified Opportunity Fund?
A Qualified Opportunity Fund “QOF” is an investment vehicle that is set up as either a partnership or corporation for investing in eligible property that is located in a qualified opportunity zone. Eligible property includes real estate, business interests, and business assets.
What Are the Tax Benefits of Investing in a Qualified Opportunity Fund?
There are three tax benefits including temporary tax deferral, partial exclusion of capital gains after a certain holding period, and permanent exclusion of capital gains after a longer holding period.
If you sell a capital asset and invest the gain in a QOF within 180 days of the sale, you can defer paying capital gains taxes on that sale until the earlier of 1) when you sell your investment or 2) December 31, 2026.
If your holding period is at least five years, you may exclude 10% of the deferred gain from inclusion in income. If your holding period is at least seven years, you may exclude an additional 5% of the deferred gain, for a total of 15%, from inclusion in income. The gain exclusion comes in the form of a step-up in basis.
While the deferred gain will have to be recognized by December 31, 2026 at the latest, if you continue to hold a QOF investment for at least ten years, you can also exclude from income all of the post-acquisition gain from your investment. This means that you would not pay any capital gains tax on the eventual sale of the QOF.
Who Can Invest in a Qualified Opportunity Fund?
Any investor can receive the tax benefits of investing in a QOF. You do not have to live, work or have a business in an opportunity zone. All you need to do is invest your capital gain in a QOF within 180 days of the sale and elect to defer the tax on that gain.
Finding a Qualified Opportunity Zone
If you’re interested in investing in a qualified opportunity zone, you can see a list or map of eligible areas maintained by the Treasury Department.
Curious how investments are impacting your or your business’s taxes? One of our experts would be happy to take a closer look. Shoot us a message and we’ll schedule a time to chat.
