Frequently Asked Questions
Understanding Opportunity Zone Investments
What is a Qualified Opportunity Zone (QOZ)?
A QOZ is an economically distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment.
How were QOZs created?
QOZs were added to the tax code by the Tax Cuts and Jobs Act on December 22, 2017
What is the purpose of QOZs?
QOZs are an economic development tool—that is, they are designed to spur economic development and job creation in distressed communities.
How do QOZs spur economic development?
QOZs are designed to spur economic development by providing tax incentives for investors who invest new capital in businesses operating in one or more QOZs.
- First, an investor can defer tax on any prior eligible gain to the extent that a corresponding amount is timely invested in a Qualified Opportunity Fund (QOF). The deferral lasts until the earlier of the date on which the investment in the QOF is sold or exchanged, or December 31, 2026. If the QOF investment is held for at least 5 years, there is a 10% exclusion of the deferred gain. If held for at least 7 years, the 10% exclusion becomes 15%.
- Second, if the investor holds the investment in the QOF for at least 10 years, the investor is eligible for an adjustment in the basis of the QOF investment to its fair market value on the date that the QOF investment is sold or exchanged. As a result of this basis adjustment, the appreciation in the QOF investment is never taxed. A similar rule applies to exclude the QOF investor’s share of gain and loss from sales of QOF assets.
What is a Qualified Opportunity Fund (QOF)?
A QOF is an investment vehicle that files either a partnership or corporate federal income tax return and is organized for the purpose of investing in QOZ property.
Tax Benefits of Opportunity Zones
What type of gains are eligible for deferral if I invest in a QOF?
Gains that may be deferred are called “eligible gains.” They include both capital gains and qualified 1231 gains, but only gains that would be recognized for federal income tax purposes before January 1, 2027, and that are not from a transaction with a related person. For you to obtain this deferral, the amount of the eligible gain must be timely invested in a QOF in exchange for an equity interest in the QOF (qualifying investment). Once you have done this, you can claim the deferral on your federal income tax return for the taxable year in which the gain would be recognized if you do not defer it.
When do I have to invest the amount of an eligible gain in a QOF to qualify for the QOZ tax incentives?
Generally, you have 180 days to invest an eligible gain in a QOF. The first day of the 180-day period is the date the gain would be recognized for federal income tax purposes if you did not elect to defer the recognition of the gain.