The 2017 Tax Cuts and Jobs Act established the Qualified Opportunity Zone (QOZ) program to provide tax incentives to invest in lower-income communities across the United States, the District of Columbia, and five U.S. territories. The program’s goal was to stimulate economic development by incentivizing investors to reinvest capital gains in real estate property or businesses located in economically distressed communities.
With over 8,760 designated Opportunity Zones across the U.S. and its territories, there’s a chance your property may be located in one of these areas.
How Are Qualified Opportunity Zones Determined?
Opportunity Zones (OZs) are defined as “economically-distressed communities where new investments, under certain conditions, may be eligible for preferential tax treatment.” To be officially designated as a QOZ, each state nominates low-income areas by census tract, which are then certified by the Secretary of the U.S. Treasury by a delegation of authority to the Internal Revenue Service.
Where Are Opportunity Zones Located?
There are 8,764 OZs in the United States, including the District of Columbia and U.S. territories. Zones are identified by state, county, and census tract numbers and investors can search the OZ database by typing in an address. The OZ database also breaks down OZs by state and territory as well as OZ funds within that state or territory. You can see the name of the OZ fund, asset classes, property types, and the size of the fund. You can also visit the U.S. Department of Housing and Urban Development for a map of Opportunity Zones.
Is My Property in a Designated Qualified Opportunity Zone?
Nearly 35 million Americans live in communities designated as Opportunity Zones, but even if your property isn’t located in a designated QOZ, you can still take advantage of these tax incentives. Any tax paying individual or entity can create a Qualified Opportunity Fund (QOF), which is a vehicle structured as a partnership or corporation to invest in the OZ, through a self-certification process. To become a QOF, an eligible corporation or partnership self-certifies by annually filing Form 8996 with its federal income tax return. The QOF must hold 90% of its assets in the QOZ.
A QOF must also make “substantial improvements” to the properties in which they invest for preferential tax treatment. Substantial improvements are defined as investments in the property that are equal to the original value paid by the fund. You can also defer capital gains taxes from prior investment if those gains are then invested in a QOF within 180 days of the sale. Taxes are then deferred to either the day when the QOF investment is sold, exchanged, or December 31, 2026 — whichever comes first.
Keep in mind that Opportunity Zone investments vary by location, and not all will be great investments. Each state also handles QOZ programs differently, so it’s essential to be familiar with the area and to have a fund manager that has experience in that specific geographic region.
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. All real estate investments have the potential to lose value during the life of the investment.
The actual amount and timing of distributions paid by programs is not guaranteed and may vary. There is no guarantee that investors will receive distributions or a return of their capital.