Opportunity Zones are specific census tracts (roughly 20% of each state) nominated by the Governor of each state that qualify for investment in business or property through Qualified Opportunity Funds.
When defining an Opportunity Zone, the term “low-income community” takes its definition from Section 45D(e) of the IRS Code. This code states that a population census tract, in general, is low-income if:
(A) the poverty rate for such tract is at least 20 percent, or
(B) (i) in the case of a tract not located within a metropolitan area, the median family income for such tract does not exceed 80 percent of statewide median family income, or
(ii) in the case of a tract located within a metropolitan area, the median family income for such tract does not exceed 80 percent of the greater of statewide median family income or the metropolitan area median family income.
There are more than 8,700 Opportunity Zones in the United States. In addition, nearly all of Puerto Rico is an Opportunity Zone. Browse our map below to see designated Opportunity Zones across the country.
Qualified Opportunity Funds are unique investment vehicles that encourage investors to take advantage of new tax incentives incorporated invest in businesses and property located in Opportunity Zones. These funds vary in many magnitudes depending on the purpose of the fund. Many of the funds are taking the initiative to measure the impact they are having within the communities they invest. If you’re interested in learning more about impact measuring please contact us.
There are several requirements to starting a Qualified Opportunity Fund. We have listed a few below:
For more information on the requirements check out our OZ Investors Federal Tax Compliance Checklist.
Specific tax incentives are offered to tax payers that invest their capital gains into Qualified Opportunity Funds based on the length of time their investment is held. These tax incentives include:
The tax payer has 180 days in which to reinvest capital gains into a Qualified Opportunity Fund. Reinvesting capital gains allows tax payers to defer capital gains tax until the “recognition date,” which is the earlier of disposition, or December 31, 2026. At the recognition date, the tax payer must pay capital gains tax on the initial investment at the short- or long-term capital gains rate depending on the types of gains originally invested.
At the time of investment in the QOF, the deferred gain basis begins at zero. After five years, the basis increases to 10% of the basis assigned to the invested capital gains, andAfter seven years, the basis increases to 15% of the original basis assigned to the invested capital gains. Thereby reducing the tax liability by 10% to 15% when payable if the initial investment holding period is five- to seven-years.
If a taxpayer holds the investment in the QOF for at least 10 years and meets the original use or substantial improvement qualification, then the taxpayer will not pay capital gains tax on the appreciation of the investment. Long-term investment holding periods through 2047 will result in a step-up of cost basis to fair market value at the taxpayer’s election.