The Opportunity Zone program is an economic development initiative enacted by Congress as part of the Tax Cuts & Jobs Act on December 22, 2017. The program was created to promote investment in specific rural and urban communities known as Opportunity Zones. The program features long-term tax benefits for U.S. taxpayers to incentivize them to invest their realized capital gains into real property and operating businesses located within Opportunity Zones.
Investors can invest cash equal to any capital gains realized in the previous 180 days with Qualified Opportunity Funds. Qualified Opportunity Funds invest in real estate or businesses within designated Opportunity Zones. The zones are census tracts that contain commercial, industrial, and residential areas within each of the 50 states and territories.
Opportunity Zones provide three distinct benefits to investors…
1) Deferral: Investors can defer tax on any prior gains invested in a QOF until the investment is sold or December 31, 2026, whichever event comes first.
2) Reduction: The tax obligation on capital gains that have been moved into a QOF will be reduced. Taxes on investments held for 5 years will be reduced by 10%. At 7 years, the capital gains tax reduction on the initial investment increases to 15% (if invested prior to 2020).
3) Exclusion: If the investment in the QOF is held for at least 10 years, all accrued gains from the fund are exempt from taxation.