Originally conceptualized by the Economic Innovation Group (EIG) in 2015 and established by Congress in the Tax Cuts and Jobs Act of 2017, the opportunity zone program was created to stimulate economic growth in designated low-income communities in return for capital gains tax breaks. Opportunity zones are designated low-income census tracts with a poverty rate of 20% or a median family income of up to 80% of the area median. There are 8,762 opportunity zones spanning all fifty states and five U.S. territories (American Samoa, Guam, Northern Mariana Islands, Puerto Rico, and the Virgin Islands).
The opportunity zone program was designed with three favorable tax incentives for investors to encourage participation. The tax incentives offered by the Opportunity Zone Program include:
Taxes on initial capital gains of appreciated assets can be deferred if invested into a QOF within 180 days.
10% reduction of the deferred gain if the investments are held in a QOF for longer than 5 years
15% reduction of the deferred gain if the investments in a QOF are held longer than 7 years
No taxes on new capital gained if the investment is held in the QOF for 10 years or more.
Year 1, 2019: Capital gain deferred into opp fund: $100
Year 5, 2024: Tax liability on $100 capital gain is decreased by 10% to $90
Year 7, 2026: Tax liability on $100 capital gain is decreased an additional 5% to $85
Pay capital gains tax of x% on $85 vs $100
Continue holding $100 interest in opp fund
Year 10, 2029: Original investment of $100 has appreciated to $150. By holding interest for 10 years, you earn the right to pay no capital gains tax on $50 earned.
What is a Qualified Opportunity Fund (QOF)?
A QOF is an investment vehicle (corporate or partnership entity) established for the purpose of investing in Qualified Opportunity Zone Property (QOZP). QOZP consists of stock, partnership interests, and business property and excludes sin businesses (liquor stores, strip clubs, casinos, massage parlors, racetracks, golf courses, etc). If you were seeking to create your own qualified opportunity fund, you would fill out Form 8996 and self-certify. A QOF must invest at least 90% of its assets in QOZP. For each month it fails to meet the 90% requirement, the fund must pay a penalty.
The Opportunity Zone Program is designed to stimulate economic development and employment creation in low-income communities by incentivizing long-term private capital investment. With an estimated $6 trillion in unrealized capital gains, there is astounding potential for distressed communities across the country to benefit. This program will enable investors to put their capital to work and accelerate economic growth in distressed communities across the country, while also taking advantage of tax incentives.
Opportunity Zones Program - The program incentivizes investors to unlock private capital and facilitate economic growth in distressed areas. Received bipartisan support and established by Congress in the Tax Cuts and Jobs Act of 2017.
Qualified Opportunity Zone (QOZ) - economically distressed community designated by the state, certified by Secretary of US Treasury and IRS.
Qualified Opportunity Fund (QOF) - an investment vehicle (corporate or partnership entity) established for the purpose of investing in Qualified Opportunity Zone Property (QOZP).
Qualified Opportunity Zone Property (QOZP) - stock, partnership interests, and business property. Excludes sin businesses such as liquor stores, strip clubs, casinos, massage parlors, racetracks, golf courses.
Tax incentives - established in Tax Cuts and Jobs Act of 2017
Immediate deferral of capital gains until 12/31/26
Future reduction in gains if the investment is held for 5 years (10%) and 7 years (15%)
Future exclusion of gains earned on interest in opportunity fund if held for 10 years.
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