Opportunity Zones are an economic development tool that allows people to invest in distressed areas in the United States.
Their purpose is to spur economic growth and job creation in low-income communities while providing tax benefits to investors.
Opportunity Zones were created under the Tax Cuts and Jobs Act of 2017. Thousands of low-income communities in all 50 states, the District of Columbia and five U.S. territories are designated as Qualified Opportunity Zones.
Taxpayers can invest in these zones through Qualified Opportunity Funds.
Benefits of investing in opportunity zones
Opportunity Zones offer tax benefits to business or individual investors who can elect to temporarily defer tax on capital gains if they timely invest those gain amounts in a Qualified Opportunity Fund (QOF). Investors can defer tax on the invested gain amounts until the date they sell or exchange the QOF investment, or Dec. 31, 2026, whichever is earlier.
The length of time the taxpayer holds the QOF investment determines the tax benefits they receive.
If the investor holds the QOF investment for at least five years, the basis of the QOF investment increases by 10% of the deferred gain.
If the investor holds the QOF investment for at least seven years, the basis of the QOF investment increases to 15% of the deferred gain.
If the investor holds the investment in the QOF for at least 10 years, the investor is eligible to elect to adjust the basis of the QOF investment to its fair market value on the date that the QOF investment is sold or exchanged.
Deferral of Eligible Gain
Gains that may be deferred are called "eligible gains." They include both capital gains and qualified 1231 gains, but only gains that would be recognized for federal income tax purposes before Jan. 1, 2027, and that aren't from a transaction with a related person. To obtain this deferral, the amount of the eligible gain must be timely invested in a QOF in exchange for an equity interest in the QOF (qualifying investment). Once this is done, taxpayers can claim the deferral on their federal income tax return for the taxable year in which the gain would have been recognized if they had not deferred it.
Taxpayers may make an election to defer the gain, in whole or in part.
The following questions and answers were prepared in response to inquiries that have been proposed to the IRS. They are intended to provide a basic understanding and awareness of Opportunity Zones. These Q&As do not constitute legal authority and may not be relied upon as such. They do not amend, modify or add to the Income Tax Regulations or any other legal authority. All information furnished from irs.gov website. Click here to be re-directed to IRS.gov for more information on opportunity zones.