What is the Opportunity Zone Program?

On December 22nd, 2017 an exciting new tax incentive program was enacted to unlock 6 trillion dollars in unrealized capital gains and promote investments in certain economically distressed communities known as Opportunity Zones.

 

If you have invested in stocks, real estate or other assets that have appreciated in value, historically you cannot sell those assets without paying huge taxes. Now, by investing in a qualified opportunity fund you can sell your appreciated asset and temporarily defer your original capital gain until 2026. You’ll also be able to reduce your capital gains expense and have the ability to permanently exclude capital gains from the appreciation yielded from your investment into the qualified opportunity fund.

 

Learn more about Opportunity Zone tax incentives.


What are Opportunity Zones?

Opportunity Zones are specific census tracts (roughly 20% of each state) nominated by the governor of each state that qualify for investment in business or property through Qualified Opportunity Funds. View a map of Opportunity Zones across the USA.


What are Qualified Opportunity Funds?

Qualified Opportunity Funds are unique investment vehicles that enable investors to take advantage of new tax incentives incorporated invest in businesses and property located in Opportunity Zones.

Opportunity Fund Requirements
Must be certified by the U.S. Treasury Department.
Must be organized as a corporation or partnership for the purpose of investing in Qualified Opportunity Zone Property.
Must hold at least 90% of their assets in Qualified Opportunity Zone Property.
Qualified Opportunity Zone property includes newly issued stock, partnership interests, or
business property in a Qualified Opportunity Zone business.

What are the Opportunity Zone Investor Incentives?

Specific tax incentives are offered to tax payers that invest their capital gains into Qualified Opportunity Funds based on the length of time their investment is held. These tax incentives include:

  1. Capital Gains Deferral
    • The tax payer has 180 days in which to reinvest capital gains into a qualified opportunity fund
    • Reinvesting capital gains allows tax payers to defer capital gains tax until the “recognition date,” which is the earlier of disposition, or December 31, 2026.
    • At the recognition date, the tax payer must pay capital gains tax on the initial investment at the short- or long-term capital gains rate depending on the types of gains originally invested.
  2. Step-Up in Basis of the Original Investment
    At the time of investment in the fund, the deferred gain basis begins at zero.

    • After five years, the basis increases to 10 percent.
    • After seven years, the basis increases to 15 percent.
    • Thereby excluding 10-15% of gain from taxation based on the investment hold period in the Qualified Opportunity Fund (QOF).
  3. Capital Gains Exclusion
    If a taxpayer holds the investment in the qualified opportunity fund for at least 10 years and meets the original use or substantial improvement qualification, then the taxpayer will not pay capital gains tax on the appreciation of the investment.

1031 Exchange versus Opportunity Zone Investment

Many investors have inquired about the primary differences between a 1031 exchange and an Opportunity Zone investment. We’ve added a table below comparing various aspects:

Comparison of Tax Deferred Real Estate Investment Structures

 

Comparison 1031 Exchange Opportunity Zone
Use of Property Must be like-kind Does not need to be like-kind
Nature of Property Must be real estate Can be real estate, business property or operating business.
Identification of Reinvestment 45 days 180 days
Closing on Reinvestment 180 days 180 days
Proceeds to invest Entire proceeds from sale Only the gain on the sale
Partnership Interests Not allowed Allowed
Stock in Corporations Not allowed Allowed
Recognition of Deferred Gain Upon sale of replacement property unless further deferred to new like-kind property “Recognition Date”- earlier of sale of investment in QO Fund, or December 31, 2026
Tax Basis Step-Up None 10% if 5-year hold. 15% if 7-year hold.