What is a Qualified Opportunity Zone?
An Opportunity Zone is a community nominated by the state and certified by the Treasury Department as qualifying for this program. The Qualified Opportunity Zone program was created in 2017 to encourage economic growth in underserved communities through tax incentives for investors who utilize “Opportunity Funds” to invest in the Zones. Along with tax benefits, it presents opportunities for real estate investment and development in those communities. The Treasury Department has certified zones in all 50 states, Washington, D.C., and U.S. territories. There are approximately 8,700 Opportunity Zones nationwide.
How does this program work?
The program provides three tax benefits for investing unrealized capital gains in Opportunity Zones:
- Temporary deferral of taxes on previously earned capital gains. Investors can place existing assets with accumulated capital gains into Opportunity Funds. Those existing capital gains are not taxed until the end of 2026 or when the asset is disposed of.
- Basis step-up of previously earned capital gains invested. For capital gains placed in Opportunity Funds for at least 5 years, investors’ basis on the original investment increases by 10 percent. If invested for at least 7 years, investors’ basis on the original investment increases by 15 percent.
- Permanent exclusion of taxable income on new gains. For investments held for at least 10 years, investors pay no taxes on any capital gains produced through their investment in Opportunity Funds (the investment vehicle that invests in Opportunity Zones).