As part of the 2017 Tax Cuts and Jobs Act, Congress created the Investment in Opportunity Act, better known as the Opportunity Zone program. This legislation allows taxpayers to defer paying taxes on capital gains by reinvesting the gains into specifically designated areas known as Qualified Opportunity Zones.
Each state governor was allowed to select up to 25% of their respective state's low-income census tracts as eligible for inclusion in the program, and nearly 9,000 zones were ultimately designated as qualified by the IRS. Investors initially had a specific window within which to invest proceeds from then-current taxable events, with early entrants potentially qualifying for more significant long-term benefits with sustained participation. Later capital gains must be invested into a qualifying fund within 180 days from the taxable event.
What Are the Potential Benefits to the Taxpayer?
Taxpayers who have capital gains due because of the sale of real estate, stocks, or other investments before January 1, 2027, can defer the taxes by rolling the gains into a qualified opportunity fund and filing Form 8949 and Form 8997.
- Any tax due on a capital gain will be deferred as long as the gain is invested in a QOF unless the investment is sold or until December 31, 2026.
- If the capital gains remain invested in a QOF for five years or longer, the capital gain on the original investment will be reduced by 10%.
- If the capital gains remain invested in a QOF for seven years or longer, the capital gain on the original investment will be reduced by 15%.
- If the investment is held for ten years, the taxpayer obtains the 15% reduction above and is exempt from capital gains tax on the investment in the QOF investment.
It is helpful to keep in mind that only funds obtained as a capital gain from a previous investment and rolled into a QOF are eligible for this treatment. Therefore, non-capital gains supplements to the projects do not receive the same QOZ tax advantages.
How Do Municipalities Participate?
The program's goal is to encourage private investment in areas that need it the most and have been overlooked by investors. As noted by one of the bill's authors and stalwart supporters, former Congressman Pat Tiberi, "It's about people putting their private dollars into communities." While the identification of eligible zones was initiated at the state level and finalized by the IRS, involvement by local and regional governmental agencies, businesses, and civic boosters helps demonstrate a supportive environment. While municipalities can't invest in the funds directly (they do not pay income taxes), they can identify, encourage, and support projects with local value.
Many states have created clearinghouses to provide information and resources about QOZ projects underway and under consideration in their respective states. Local governments also form public-private partnerships to assist the development of projects in their areas.
The Economic Innovation Group, a public policy group that both helped formulate the initiative and tracks projects and progress, has estimated that over $6 trillion worth of potential capital gains may be eligible to be invested in the QOZ funds. Investments to date have eluded a definitive count but seem to be around $75 billion as of the end of 2020. There is more potential for both municipalities and investors in the remaining years of the program.
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. 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. 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.