What Are the Holding Requirements for Opportunity Zone Investments?

Posted Mar 8, 2021


As part of the 2017 Tax Cuts and Jobs Act (TCJA), an Opportunity Zone is a designation and an investment program that allows for certain investments in lower-income areas to have tax advantages. There are over 8,700 designated Qualified Opportunity Zones (QOZ) in all 50 states, the District of Columbia, and five U.S. territories. The goal of the program was to create jobs and stimulate economic development by incentivizing investors to reinvest capital gains in real estate property or businesses located in economically-distressed communities. 

Before investing in an Opportunity Zone, investors must be aware of specific holding requirements to qualify for preferential tax treatment. 

Investing in Opportunity Zone Properties

To qualify for tax advantages, investments in a QOZ must be made through a Qualified Opportunity Fund (QOF), which can be established as a corporation or a partnership.

Opportunity Funds have specific requirements to qualify:

  • They’re organized for the purpose of investing in QOZ property.
  • Opportunity Funds must make “substantial improvements” to the QOZs in which they invest. These improvements must be equal to the original value paid by the fund, and they must be paid within 30 months. For example, if the fund paid $300,000 for a property, then $300,000 worth of improvements must be made within that 30-month timeframe.  
  • The Opportunity Fund must hold at least 90% of its assets in QOZ property which is based on the average percentage of two annual testing dates.
  • Meet annual investor reporting requirements by filling out Form 8897 with a timely filed federal tax return.

Tax Benefits and Holding Requirements for Opportunity Zone Investments

To defer eligible capital gains, accredited investors must invest in a QOF in exchange for equity interest within 180 days of realizing that gain earned before January 1, 2027. If not done correctly within the set window, the gain would be recognized for federal income tax purposes on the first day after the 180-day period.

Tax benefits depend on the amount of time the investor holds the QOF investment. Here are the three tax benefits and their holding requirements:

  • Deferral of taxes on previously earned capital gains: Existing assets with accrued capital gains can be placed into a QOF and be deferred until the end of 2026 or when the asset is sold.
  • Step-up in basis of previously earned capital gains invested: For capital gains placed in a QOF for at least 5 years, the investor’s basis on the original investment increases by 10%. If more than 7 years, it increases by 15%.
  • Exclusion of taxable income on new gains: Investors pay no capital gains tax accumulated through their investment in the QOF for investments held for at least 10 years.

Time Your Opportunity Zone Investments

Accredited investors can search for QOF from the National Council of State Housing Agencies (NCSHA) Opportunity Zone Fund Directory by fund size, investment type, or geographic location. If you have a specific tax benefit in mind, it’s essential that you review the holding requirements for Opportunity Zone investments and time it accordingly.

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.

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