How Do Opportunity Zones Work?
The Opportunity Zone program was created on December 22, 2017, through the passage of the Tax Cuts and Jobs Act (26 U.S. Code § 1400Z). The program incentivizes long-term private investment in economically distressed areas throughout the United States by enabling investors with capital gains tax liabilities to receive favorable tax treatment.
Opportunity Zones are low-income census tracts designated by governors and certified by the U.S. Department of Treasury. There are 8,762 census tracts across all 50 states, Washington, D.C., and five U.S. territories certified as Opportunity Zones.
If a taxpayer realizes capital gains from the sale of an investment, his or her taxable gains are eligible to be rolled over within 180 days into a Qualified Opportunity Fund. A Qualified Opportunity Fund is an investment vehicle established for investing in eligible Opportunity Zone property. The Qualified Opportunity Fund uses the invested capital to make equity investments into Opportunity Zone businesses and real estate.
Investing in Opportunity Funds offers three primary tax benefits:
- Tax Deferral on Invested Capital Gains. Any capital gains rolled over into an Opportunity Fund will be tax deferred until December 31, 2026, or earlier if the investor sells his or her investment in the fund.
- Tax Reduction on Invested Capital Gains. If the investment is maintained for at least 5 years by the time tax deferral status ends, the tax liability of the invested capital gains is reduced by 10%; if maintained for at least 7 years, taxes on the gains are reduced by 15%.
- No Tax on Gains from Investment in Opportunity Fund. If the investment is maintained for at least 10 years, any capital gains derived from the sale of the investment bears zero capital gains tax liability.