Understanding The Opportunity Zone Program

Supporting economic revitalization, in an effort to benefit from tax-deferment strategies

Qualified Opportunity Zone Program

Introduced under the Tax Cuts and Jobs Act of 2017, the Opportunity Zone program is an economic development and revitalization program. The idea behind the program is that capital gains from the sale of investment assets are channeled toward lower-income, federally-designated Qualified Opportunity Zones (QOZs).

As a participant in the Opportunity Zone program, you could receive the following benefits:

  • Deferral of capital gains recognition until December 31, 2026, as long as the gains are rolled over into opportunity zone investments within 180 days of capital asset sales. You will have to pay taxes on capital gains when you file your taxes in 2027.
  • Elimination of capital gains tax liability within opportunity zone investments, as long as the investment is held for at least 10 years. This means that capital gains earned will not be taxed, as long as it is held for that decade-long period.
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This material is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

Hypothetical example(s) are for illustrative purposes only and are not intended to represent the past or future performance of any specific investment.

While beneficial in a variety of ways, the Opportunity Zone program regulations can be somewhat complex. It also carries a different risk profile versus other property investments, such as Delaware Statutory Trusts (DSTs). For example:

  • You can only invest capital gains from the sale of capital assets into an Opportunity Zone. Meanwhile, DST investment criteria is broader; you can either exchange into ownership or acquire DST units with any type of capital.
  • Depreciation recapture is a factor with QOZ investments. However, DST investments can help defer depreciation recapture using the 1031 exchange.
  • Opportunity zones focus on specific geographically defined boundaries. DSTs have no geographic limitations (as long as investments are in the United States).
  • Opportunity Zone Sponsors must adhere to “substantial improvement” property requirements for possible tax deferrals; DSTs have no such requirement.

Below is other general information to help you improve your understanding of the program, and help you determine whether participation might be a good fit for your investment goals.

Ways to Invest–Opportunity Zone Funds

Funds Charts iPad

Opportunity Zone Funds, or Qualified Opportunity Funds (QOFs), are partnerships or corporations with the sole purpose of investing in Opportunity Zones. Rather than putting your money directly onto QOZs, you invest in the funds, which then funnel your capital gains into QOZ projects.

QOFs typically fall into one of two categories:

Identified funds have specific QOZ projects already in the works, or under contract. The advantage to this fund structure is that you know upfront what project or projects are being financed and developed. These funds are more transparent, and you can actually visit the development sites.

Semi-blind funds focus on raising capital first, then finding likely projects on which to spend that money. While these funds aren’t as transparent as their identified counterparts (and can be riskier), they have a higher level of liquidity. This can help lead to a quick acquisition and closing.

As is the case with other finances or funds, it’s essential to perform due diligence on QOFs prior to investing. Some of the details to examine include the following:

Track record. Because the Opportunity Zone program is still relatively new, complete information about a QOF’s performance might not be immediately available. In this situation, you can examine the Sponsor’s previous projects, risk mitigation efforts, returns, and other pertinent information.

Targeted property/properties. Whether the fund is investing in business property, stock, or a partnership interest, it’s important to understand where your money will be going and how it will be used. For instance, if the QOF is focused on real estate development, be sure to understand the viability of the asset type and where it is in the real estate cycle. If the focus is on stock or a QOZ company, ask to see a business plan and cash flow estimates. However, if you are investing in semi-blind funds, this information may not be available to you.

Geography. While there are more than 8,700 designated Opportunity Zones, not all of them may be a fit depending on each individual’s investment preferences and risk tolerances. Be sure to examine demographics, market data, location (both part of the country and where, within the actual QOZ), and competition.

Personnel. It’s also a good idea to know with whom you are investing. Reach out to the QOZ Sponsors and managers, and take some time to learn about the team (including how long it has worked together). This is also the time to get answers you might have concerning income distribution or tax preparation requirements.

You want to come away from the due diligence process knowing that the investment makes sense for you and your goals. Just because an investment is labeled “Opportunity Zone” doesn’t make it a viable or workable investment opportunity for you.

The Investor's Guidebook

A Qualified Opportunity Zone investment can be a great opportunity to defer taxes, however, it can be a complicated process, but it doesn’t need to be.  The key is planning, and that’s why we’ve created an investor's guide to Qualified Opportunity Zone investing. It tackles the art and science of completing your investment, and the pitfalls to avoid.

Download

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Investment Targets – Opportunity Zone Property

finding QOZ targets

The main requirement for QOFs is that at least 90% of their assets must consist of qualified opportunity zone property (QOZP). QOZP falls into three asset classes: Qualified Opportunity Zone Partnership Interests, Qualified Opportunity Zone Stock, and Qualified Opportunity Zone Business Property.

Qualified Opportunity Zone Business Property (QOZBP)

The IRS defines QOZBP as that which:

  • Is used in the trade or business of the Qualified Opportunity Fund or in a Qualified Opportunity Zone Business
  • Is placed in service in the QOZ for the first time
  • Was acquired after December 31, 2017

Meanwhile, a Qualified Opportunity Zone Business (QOZB) entity must observe at least one of the following requirements:

  • Earns at least 50% of its income from business activities conducted within a QOZ
  • Performs at least half of its aggregate hours of service in a QOZ or
  • Pays at least half of the aggregate amounts for services performed in a QOZ
  • Has substantially all of its necessary tangible property and business functions in a QOZ

Qualified Opportunity Zone Partnership Interest (QOZPI)

The QOZPI refers to a QOF that has a stake in a domestic partnership as long as:

  • The QOF acquired the interest after December 31, 2017
  • The interest is acquired solely in exchange for cash
  • The partnership operates as a QOZB, or if new, the partnership is set up to operate as a QOZB
  • During the holding period, the partnership qualifies as a QOZB

Through this structure, the Qualified Opportunity Fund becomes an actual partner of a Qualified Opportunity Zone Business by acquiring a stake in that business for cash (generated from QOF investors).

Qualified Opportunity Zone Stock (QOZS)

The concept behind QOZS isn’t too different from that of investing in a mutual fund which, in turn, channels that money into a company. In this scenario, the QOF buys into a Qualified Opportunity Zone Business by providing equity directly to that entity.

This structure differs from Qualified Opportunity Zone Business Property. QOZBPs consist of tangible assets (such as real estate or equipment operating within QOZs). Stock, on the other hand, focuses on liquidity and equity. 

QOZP Requirements

Whether the QOZP assets consist of business property, partnership, or stocks, the QOF must meet the following requirements so you can take advantage of tax deferral strategies :

  • At least 90% of all assets must be Qualified Opportunity Zone Property
  • At least 70% of total use of tangible property must take place within the QOZ
  • The QOF must substantially improve the Opportunity Zone property by doubling the property’s adjusted basis within 30 months after purchase

When to Invest – Opportunity Zone Timelines

Risk and Timelines

While the ability to take advantage of 5% and 10% of deferred gain expired on December 31, 2021, it’s still possible to benefit from Opportunity Zone investments. Keep in mind the following deadlines:

  • June 28, 2027

    The last date in which to invest 2026 capital gains. This is also the final deadline to benefit from the 10-year gain exclusion through your QOF investment.

  • December 31, 2028

    QOZ destinations expire. Still, QOFs are still active and can qualify to receive the 10-year gain exclusion.

  • June 28, 2037

    The earliest date on which the final Opportunity Zone investments can be sold and qualify for the 10-year gain exclusion. The 10-year gain exclusion also starts ending on this date for deferred gains invested into QOZF from 2026 through June 28, 2027. If held for 10 years, those investments can now be sold.

The Opportunity Zone program can provide investors with the ability to defer capital gains tax or reduce capital gains liability entirely if investments are managed correctly. However, there are limitations and deadlines investors must keep in mind when it comes to evaluating whether QOZs are right for investors:

  • Are you comfortable investing into a blind fund and not knowing specific property information?
  • Is there historic information to reference to help you perform your due diligence?
  • Do the QOZ locations throughout the country align with your geographic investment preferences.

While these factors and more present more limited investment opportunities than investing in DSTs, there are potential benefits that may align with your long-term objectives. Talk to your financial professional about whether QOZs have a place in your investment portfolio.

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. It should also not be construed as advice meeting the particular investment needs of any investor.

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.

No public market currently exists and one may never exist. DST programs are speculative and suitable only for Accredited Investors who do not anticipate a need for liquidity or can afford to lose their entire investment. 

There is no guarantee that the investment objectives of any particular program will be achieved. Please consider all risks, fees and expenses associated with QOZ or DST investments. All real estate investments have the potential to lose value during the life of the investment.

The income stream and depreciation schedule for any investment property may affect the property owner's income bracket and/or tax status.

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.

Selected Blog Articles


Can Substantial Improvement in an Opportunity Zone Be Personal Property?

Can Substantial Improvement in an Opportunity Zone Be Personal Property?

Many discussions pertaining to the “substantial improvement” requirement of Qualified Opportunity Zones (QOZs) focus on real estate. For instance, capital investment and renovation of an older office building. Or ground-up construction ...

Apr 20, 2022

Can an LLC Be a Qualified Opportunity Fund?

Can an LLC Be a Qualified Opportunity Fund?

Here are a few basic facts about the Opportunity Zone program, which came into being as part of the Tax Cuts and Jobs Act of 2017.

Jan 11, 2022

Can a Distillery Be an Opportunity Zone Business?

Can a Distillery Be an Opportunity Zone Business?

Opportunity Zones, commonly referred to as Qualified Opportunity Zones or QOZs, were created by the 2017 Tax Cuts and Jobs Act. Formally known as the Investment in Opportunity Act, the relevant portion of the legislation was included ...

Dec 29, 2021

Terms to Know


Rule 144A

Introduced in 2012, Rule 144A reduces the amount of time a qualified institutional buyer must hold privately placed securities from 2 years to six months for a company that reports to the SEC or a year for a company that does not. The ...

Original Use

In order to qualify as a qualified opportunity zone business property (QOZBP), property acquired by a QOF or QOZB must satisfy the requirements of an “original use” test or a “substantial improvement” test. Original use is defined as ...

Intangible Property Test

In order to qualify as a QOZB, a firm must deploy a substantial portion of its intangible property in the active conduct of a trade in a QOZ, defined as at least 40 percent.

50% Gross Income Test

In order to qualify as a QOZB, an investor must demonstrate that a property or business generates at least 50 percent of its gross income from the active conduct of a trade or business in a QOZ. A trade or business will satisfy the 50% ...

Inclusion Event

An inclusion event occurs when a QOF investor chooses to recognize some or all deferred gains. An inclusion event will occur on the earlier of the occurrence of the event or December 31, 2026, per the Proposed Regulations.