What is an Opportunity Zone?
Passed in 2017 and further defined in 2018, the Tax Cuts and Jobs Act enacted a capital gains tax incentives program designed to promote long-term investments and economic development in economically distressed communities with potential for revitalization, identified as Opportunity Zones.
With over 8700 census tracts in the United States, these zones were nominated by governors based on a handful of characteristics such as poverty levels, economic need, and unemployment rate.
The only way to invest in an Opportunity Zone and qualify for tax benefits is through a Qualified Opportunity Fund (QOF). To receive preferential tax treatment, investors must invest recently realized capital gains (within 180 days of sale close date) into a QOF. Any type of capital gain (not just real estate sales) qualifies for the following tax benefits in a QOF:
- Defer tax on recently realized capital gains until December 31, 2026 or the day the QOF investment is sold or exchanged, whichever comes first
- Reduce tax on recently realized capital gains by 10% if held for five years and another 5% (15% total) if held for seven years in a QOF (currently, only an investment made by the end of 2019 can be held for 7 years until the 12/31/2026 ultimate deferral date)
Additionally, if your investment in the QOF also produces gains, you can:
- Eliminate tax on capital gains earned from your Opportunity Zone investment if held in a QOF for 10 years
Click here to read Frequently Asked Questions from the IRS website.
What is a Qualified Opportunity Fund (QOF)?
A QOF is an investment vehicle designed to invest at least 90% of its assets into equity investments in businesses or real estate within an Opportunity Zone.
QOFs are primarily set up to incentivize the utilization of recently realized capital gains, therefore, only those investments will receive the tax benefits. You can invest non-capital gains into a QOF, however, you will not get the preferential Opportunity Zone tax treatment.
For QOFs offered on NextSeed, only accredited investors can participate.
How do I know where an Opportunity Zone is?
You can find maps of Opportunity Zones on sites such as the Economic Innovation Group's Policy Map. Additionally, you can search state governmental sites for specific state-wide information.
The above is provided for educational purposes only and does not constitute legal or tax advice. Please consult your personal legal and tax advisors for specific advice applicable to your personal situation.