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.
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:
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:
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.