Background of The Opportunity Zones Program
Written into the Tax Cuts and Jobs Act of 2017, the first Opportunity Zone designations became official in April of 2018 in 18 states. With other states quick to follow, Opportunity Zones have now made their way to all 50 states and five US territories.
Opportunity Zones are tracts of land throughout the country designated as economically distressed and in need of investment. The US government offers tax breaks on eligible capital gains invested in Qualified Opportunity Zone Funds within these areas to incentivize investment. The goal of the Opportunity Zones program is to bring a swift and sustained influx of capital to revitalize neighborhoods in great need of capital injections. These tax incentives confer a distinct financial advantage for Opportunity Zone investments vs. non-Opportunity Zone investments, allowing the community within the Opportunity Zone to realize the benefits of increased investment and investors to benefit from more profitable returns.
How the Opportunity Zone Program Works
To invest capital gains into an Opportunity Zone project, eligible gains must be placed in a qualified opportunity fund (QOF) within 180 days from the time “the gain would be recognized for federal income tax purposes.” QOFs can then invest in Opportunity Zone businesses or develop Opportunity Zone properties as designated by the fund. The deadline to invest gains realized in 2020 has been extended to the end of the calendar year due to COVID.
The tax benefits on eligible gains (qualified capital gains and qualified Section 1231 gains) resulting from an Opportunity Zone investment are tremendous.
- Taxes on eligible gains can be deferred as soon as the gains are invested into a qualified opportunity fund (QOF). The deferred taxes must be paid by the end of 2026 or when the investment is sold/exchanged, whichever occurs first.
- If the investment is held for at least five years, the tax on the original capital gains decreases by 10%.
- If the investment is held for at least ten years, the capital gains accrued through the Opportunity Zone investment are designated as tax-free.
Because of these tax advantages, Opportunity Zone investments remain very attractive to investors and are often seen as a hedge against market uncertainty. As the Opportunity Zone program matures, we are seeing growth in the amount of capital invested in QOFs. We are also seeing a re-affirmation of the need for Opportunity Zone projects to meet social impact goals. We encourage investors to look for projects built in the spirit of the Opportunity Zone regulations, strengthening and enhancing the communities they serve. We are excited to see what the future of Opportunity Zones holds, and we know one thing for sure; the interest in Opportunity Zones is real. Opportunity Zones are positioned for a promising future, achieving the goals of communities and investors alike.