Opportunity zones were developed to bring economic prosperity to distressed areas by giving potential tax incentives for investments in residential and commercial properties.
The Qualified Opportunity Zones (QOZs) define areas where investors can see potential federal tax incentives by deferring or reducing the liability of capital gains taxes realized on their investment. The program was established in 2017 in the Tax Cuts and Job Act.
The U.S. Department of the Treasury certified the zones in 2018 based on poverty levels, median incomes, and referrals from state governors. A state could recommend up to 25% of their state be designated a QOZ. There are currently 8,764 opportunity zones in the United States.
Residential and Commercial Investments in Opportunity Zones
Both commercial and residential properties can qualify under the program if they meet certain requirements. New construction might also qualify. If buying an existing property, it must be substantially improved over 30-months, and cannot be used as-is to qualify. The goal is to bring positive economic impact to low-income areas.
Generally, residential real estate includes single-family homes and housing with up to four units. Commercial real estate is any housing with over four units, businesses, warehouses, retail, and most other property types.
Investments in QOZs for commercial and residential properties are made through Qualified Opportunity Funds (QOFs). These are funds with 90% of its assets located in opportunity zones. The potential tax incentives include:
- Deferral of federal capital gains tax on the QOF investment.
- If the investment is held for five years the potential of a 10% discount on the realized capital gains taxes.
- If the investment is held for seven years, the possibility of a 15% reduction of capital gains taxes owed on the QOF investment.
- For an investment held more than ten years, the capital gains taxes realized on the investment might be totally eliminated.
Opportunity Zones give investors a way to help revitalize distressed areas while potentially benefiting from tax incentives. If you are considering investing in a QOF, it is best to consult with an experienced investor or financial advisor to consider the pros and cons.
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. The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities.