An investor who has triggered a capital gain by selling an asset like stocks or real estate can receive special tax benefits if they roll that gain into an Opportunity Fund within 180 days. There are three primary advantages to rolling over a capital gain into an Opportunity fund:
- You can defer the payment of your capital gains until Dec 31, 2026.
- You can reduce the tax you owe by up to 15% after 7 years.
- You pay ZERO tax on gains earned from the Opportunity Fund.
Opportunity Zone Funds are investment vehicles created for investors to take advantage of the recent tax code changes. The changes allow for a reduction in capital gains tax through investments in qualified Opportunity Zones. Opportunity Zones are communities that have been designated by state and federal governments where new investments aimed at improving these areas are incentivized with preferential tax benefits.
Download a list of all Opportunity Zones census tracts on a state-by-state basis here.
Here are some basics regarding Qualified Opportunity Zones and Qualified Opportunity Zone Funds:
- What are Opportunity Zones? Opportunity Zones are economically-distressed communities where new investments, under certain conditions, may be eligible for preferential tax treatment. Localities qualify as Opportunity Zones if they have been nominated for that designation by the state and that nomination has been certified by the Secretary of the U.S. Treasury via his delegation of authority to the Internal Revenue Service.
- How were Opportunity Zones created? Opportunity Zones were added to the tax code by the Tax Cuts and Jobs Act on December 22, 2017.
- Are Opportunity Zones new? Yes. The first set of Opportunity Zones, covering parts of 18 states, were designated on April 9, 2018. Opportunity Zones have now been designated covering parts of all 50 states, the District of Columbia and five U.S. territories. We have listed them all on the QOZ Marketplace for your convenience.
- What is the purpose of Opportunity Zones? Opportunity Zones are an economic development tool sanctioned by the IRS that are designed to spur economic development and job creation in distressed communities.
- How do Opportunity Zones spur economic development? Opportunity Zones provide tax benefits to investors. Investors can defer tax on any prior gains invested in a Qualified Opportunity Fund (QOF) until the earlier of the date on which the investment in a QOF is sold or exchanged, or December 31, 2026. If the QOF investment is held for longer than 5 years, there is a 10% exclusion of the deferred gain. If held for more than 7 years, the 10% becomes 15%. If the investor holds the investment in the Opportunity Fund for at least ten years, the investor is eligible for an increase in basis of the QOF investment equal to its fair market value on the date that the QOF investment is sold or exchanged.
- What makes an Opportunity Zone “Qualified”? 25% of census tracks in a state can be designated as “opportunity zones”. Those census tracts must have at least a 20% poverty rate and the medium income must not exceed 80% of the metro or state level. The designations of opportunity zones remains in effect through the end of 2028.
- What are Qualified Opportunity Funds? Qualified Opportunity Funds are investment vehicles set up as either a partnership or corporation for investing in eligible property that is located in a Qualified Opportunity Zone.
- Do I need to live in an Opportunity Zone to take advantage of the tax benefits? No. You can get the tax benefits, even if you don’t live, work or have a business in an Opportunity Zone. All you need to do is invest a recognized gain in a Qualified Opportunity Fund and elect to defer the tax on that gain.
- How does a corporation or partnership become certified as a Qualified Opportunity Fund? To become a Qualified Opportunity Fund, an eligible corporation or partnership self-certifies by filing Form 8996, Qualified Opportunity Fund, with its federal income tax return.
- Can a limited liability company (LLC) be an Opportunity Fund? Yes. A LLC that chooses to be treated either as a partnership or corporation for federal tax purposes can organize as a Qualified Opportunity Fund.
- I sold some stock for a gain in 2018, and, during the 180-day period beginning on the date of the sale, I invested the amount of the gain in a Qualified Opportunity Fund. Can I defer paying tax on that gain? Yes, you may elect to defer the tax on the amount of the gain invested in a Qualified Opportunity Fund. Therefore, if you only invest part of your gain in a Qualified Opportunity Fund(s), you can elect to defer tax on only the part of the gain which was invested.
- How do I elect to defer my gain on the 2018 sale of the stock? You may make an election to defer the gain, in whole or in part, when filing your 2018 Federal Income Tax return. That is, you may make the election on the return on which the tax on that gain would be due if you do not defer it.
- I sold some stock on December 15, 2017, and, during the required 180-day period, I invested the amount of the gain in a Qualified Opportunity Fund. Can I elect to defer tax on that gain? Yes. You make the election on your 2017 return by attaching Form 8949 to report information about the sale of your stock.
- Can I still elect to defer tax on that gain if I have already filed my 2017 tax return? Yes, but you will need to file an amended 2017 return, using Form 1040X and attaching Form 8949.