Can I Invest Non-Capital Gains into an Opportunity Zone?

Posted Jul 9, 2024


The Opportunity Zone program has been around for close to five years. Yet some questions remain about this initiative, including investment deadlines and what benefits can be realized from participation. 

Interestingly enough, the IRS and U.S. Treasury Department have been very clear about what types of “qualifying investments” can be made in Qualified Opportunity Funds (QOFs), which are then funneled into Qualified Opportunity Zone Properties  (QOZPs). One question that sometimes arises is: “Can I invest non-capital gains into an opportunity zone?”

The answer is no, for two reasons:

  • Only capital gains can be invested in this program.
  • Investors don’t put monies directly into Opportunity Zones. Only QOFs can do so.

Defining Financial Terms

Before discussing Opportunity Zone qualifying investments, it’s important to understand the terminology as it pertains to gains. There is no "non-capital gain.” There are non-capital losses. An example of a non-capital loss is a small business that generates more expenses than income in a given year. 

There are, however, two ways in which money is earned. This is through ordinary income or capital gains.

Ordinary income consists of wages and interest income. This would include your salary and interest earned on investments, such as CDs or savings accounts. Stock dividends are also considered ordinary income.

Capital gains are generated when you sell a capital asset for more than its purchase price, or basis. Capital assets include stock, real estate, and other investments.

It’s important to understand that non-capital gains don’t exist as a term. Instead, the above question likely refers to ordinary income. When it comes to QOZ investments, the IRS and Treasury Department are specific about what might be eligible.

Investing in QOZs

Opportunity Zones are designed to encourage private investors to take an interest in federally designated lower-income tracts. The result of this is to promote economic development, growth, and revitalization. 

The way in which private investors are encouraged to invest in Qualified Opportunity Funds is by investing their capital gains into these funds. The benefit of this type of investment is that taxes can be deferred on those capital gains. Furthermore, depending on the investor's involvement in a QOF, any proceeds generated by the investment could be excluded from future capital gains taxes. 

As mentioned above, capital gains represent the profit earned from a capital asset sale. As such, ordinary income is not eligible for investment in Qualified Opportunity Zones.

Is it a Good Investment?

Whether capital gains should be invested in a Qualified Opportunity Fund depends on many factors. These can include portfolio diversification risk appetite. Like other investment types, the Opportunity Zone program is not for everyone. 

As such, if you are in the process of selling an asset and want to defer taxes on capital gains from that sale, it’s a good idea to talk to your financial expert or tax advisor to determine your next steps. Doing so can help you make the right decision regarding your investment goals.

There are material risks associated with investing in QOZ properties and real estate securities including liquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and potential loss of the entire investment principal. Costs associated with a real estate transaction may impact investor’s returns and may outweigh the tax benefits. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation. This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice, meeting the particular investment needs of any investor.

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