The Federal Opportunity Zones Program Allows Investors to Defer or Reduce Capital Gains Taxes
Initiated as a result of the Tax Cuts and Jobs Act of 2017, the Opportunity Zones program offers some of the strongest federal tax incentives of any government program in recent history. By investing in a Qualified Opportunity Zone, one of 8,700 census tracts across the United States that have been certified by the U.S. Treasury Department as extremely economically disadvantaged, investors can receive incredible tax benefits, including being permitted to defer their capital gains taxes until December 31st, 2026. They will not typically need to pay these taxes until April 2027.
Opportunity Zone investments held for at least 5 years before December 31, 2026 will experience a 10% reduction in their capital gains tax basis.
Investments held for at least 7 years before the same date will experience an additional 5% reduction in their capital gains tax basis, for an overall 15% reduction.
These benefits apply equally to short-term and long-term capital gains, as well as 1231 gains (i.e. those related to a trade or business). In addition, investors pay no taxes on capital gains acquired after their money has been invested, provided they keep the money in for at least 10 years. Investors can keep their funds invested until 2047, giving them nearly three decades during which their funds can increase without any additional capital gains tax burden.
How Were Opportunity Zones Created?
Opportunity Zones were created by the Investing in Opportunity Act, part of the Tax Cuts and Jobs Act of 2017. This act received significant bipartisan support and was championed by Senators Tim Scott(R) and Corey Booker(D). It was also championed by the Economic Innovation Group, a think tank created by entrepreneur Sean Parker, founder of the music-sharing service Napster.
The Investing in Opportunity Act requested that state and territorial governors, as well as the mayor of Washington, D.C., nominate up to 25% of the low-income census tracts in their state or territory as Opportunity Zones, economically disadvantaged areas which are in need of additional investment.
In order to qualify for the program, census tracts must additionally have:
A minimum poverty rate of 20%; or
A median family income of less than or equal to 80% of the statewide median family income for non-urban census tracts; or
For census tracts within metropolitan areas, a median family income of less than or equal to 80% of the statewide median family income or the median family income for urban census tracts in the state (whichever is greater)
What is an Opportunity Fund?
In order to receive the benefits of the Opportunity Zones program, investors must invest in an Opportunity Fund. Opportunity Funds can self-certify with the U.S. Treasury Department and must invest 90% of their assets in a Qualified Opportunity Zone (QOZ). An Opportunity Fund will be tested by the U.S. Treasury Department twice a year to ensure that it complies with the 90% rule. Investors can create their own Opportunity Funds (i.e. “captive funds”, or invest in others’ Opportunity Funds.
Opportunity Funds can invest in both real estate and in businesses located in Opportunity Zones. In order to qualify, real estate must either be newly constructed, or, if it is a substantial rehabilitation, the fund must put more money into improving the property than it did to purchase the property in the first place. In order to qualify for an Opportunity Fund investment, a business must located in an Opportunity Zone and do at least 50% of its business there. This has made investing in businesses extremely challenging for Opportunity Funds, since, due to the fact that Opportunity Zones are very low-income areas, many businesses located in Opportunity Zones do a lot of business in surrounding areas which may be more affluent.
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What are the Requirements for Investing in Opportunity Funds?
In order to qualify for capital gains tax deferral, an investor must invest in an Opportunity Fund within 180 days of the sale of the assets that experienced capital gains. In addition, once an Opportunity Fund receives funds from investors, it must not hold them for more than 6 months before using them to invest in an Opportunity Zone. In addition, no more than 20% of a fund can be held by anyone financially affiliated with the fund. For example, if a party has sold land or property to an Opportunity Fund in exchange for shares in the fund itself, it can own no more than 20% of the fund.
Opportunity Zones and Other Tax Incentive Programs
The Opportunity Zones program offers a potentially lucrative tax incentive for investors— but it isn’t the only tax incentivized investment program offered by the U.S. government. For example, the Low Income Housing Tax Credit (LIHTC) program, which was created in 1986, offers investors in qualified affordable properties a dollar-for-dollar credit against their federal income taxes. The LIHTC can be used on Opportunity Fund projects, and combining both these tax incentives can create incredibly high yields for investors. In addition, the New Markets Tax Credit (NMTC) program offers tax credits to investors who develop in certain low-income areas, many of which overlap opportunity zones. Finally, the HTC, or Historic Tax Credits program provides tax incentives for investors who substantially rehabilitate historic properties. This program can also be used with Opportunity Fund investments, especially in economically distressed areas with a concentration of historic properties, such as New Orleans.
On this site, we provide a comprehensive guide to investing in Opportunity Funds. To learn more, browse our FAQ section, which includes information about investing in Opportunity Zones in California, Texas, and Florida, which contain some of the most promising Opportunity Zone investing opportunities in the country.
Opportunity Zones Map
In order to help you better understand the Opportunity Zones program, we’ve also included links to some of the highest quality Opportunity Zone maps currently available: