Opportunity Zones are an economic development tool that allows people to invest in up-and-coming communities. Their purpose is to spur economic growth and job creation while providing tax benefits to investors.
There are two important tax incentives when someone invests in a Qualified Opportunity Fund (QOF):
Deferral of Capital Gains
Any gain treated as a capital gain (including 1231 gains) generated from a sale can be deferred until December 31, 2026 by investing in a QOF. Examples of capital gains eligible for investment in a QOF are: sale of a business, stock sales, and real estate sales.
Tax Free Gain
If an investment opportunity in an Opportunity Zone (OZ) project is properly structured and held for a minimum of 10 years, appreciation and gain on the project will be tax free.
Investor Requirements
- Investors have 180 days to invest the gain in a QOF
- If held personally, the investor has 180 days from the date of the sale that triggered the gain
- If the gains flow through a Partnership, S Corporation, RIC, or REIT, the shareholder has 180 days from the passthrough entity’s tax year-end
- Taxpayers can also elect to have the 180-day period begin on the due date of the flow through entity’s return (for calendar year partnership/S-corps, this is 3/15)
Opportunity Zone Investment Timeline Example
Other Tax Benefits of Opportunity Zone Projects
- Significant depreciation deductions over the life of the project
- Deductions generally equal 100% or more of investor cash investment within 5 years of the building being placed in service – see example project summary below
- Deductions generally around 3X an investor cash investment over the depreciable life of the building (30 years)
- Losses generated by depreciation can shelter other sources of pass through income for investors on annual basis. Unused losses are also eligible to carry forward to future years
- OZ investors get the same tax benefits from depreciation as any other market-rate project through the life of the deal, however, OZ investors do not need to recapture the depreciation as additional gains on a sale if held for 10 years – presenting a huge tax savings benefit
In summary: Investing in up-and-coming “opportunity zones” offers significant tax-deferral opportunities, and if you hold your investment for 10 years, your gains could be 100% tax free.
