Top 10 Opportunity Zone FAQs
To begin the IRS maintains their own list of FAQs – please see their list before proceeding - https://www.irs.gov/newsroom/opportunity-zones-frequently-asked-questions
Where do you ask additional questions? Please go to Reddit and post your question.
Q1 – What is an opportunity zone?
A1 - Opportunity zones are part of a new program enacted under the Tax Cut & Jobs Act of 2017 (TCAJ). An opportunity zone is an economically distressed community as determined by specific government criteria and designated by the governor of each state. Investments in these areas, under certain conditions, may be eligible for preferential tax treatment. Under the TCAJ, opportunity zones are set up to encourage long-term investments in low-income communities nationwide. Each state is allowed to nominate specific census tracts to be designated opportunity zones.
Q2 – What is a Census Tract
A2 - The "Census Tract" is an area roughly equivalent to a neighborhood established by the Bureau of Census for analyzing populations. They generally encompass a population between 2,500 to 8,000 people. Bureau of Census describes them as "relatively permanent", but they do change over time. Some Census Tracts are imperfect in that they have been designated as Opportunity Zones but contain a mix of low income and prosperous commercial & residential buildings.
Q3 – What benefit do opportunity zones create for investors?
A3 – Opportunity Zones are designed with incentives for investors to make new equity investments in low-income communities. All of the underlying incentives relate to the tax treatment of capital gains and are linked to term of the investment in a Qualified Opportunity Fund (QOF). The 3 key tax incentives are:
Tax Deferral: A temporary deferral of tax due on capital gains reinvested into an Opportunity Fund. The deferred gain must be recognized on the earlier of the date on which the Opportunity Zone investment is disposed of or December 31, 2026.
Tax Reduction: A tax reduction for the deferred capital gains reinvested in an Opportunity Fund. When the Tax Deferral is due, the amount due is reduced by 10% if the investment in the Opportunity Fund is held by the taxpayer for at least 5 years and by an additional 5% if held for at least 7 years, thereby reducing up to 15% of the original deferred gain from taxation.
The Magic: If the investment is held for at least 10 years in a QOF, the capital gains from the sale or exchange of an investment in an Opportunity Fund is not taxable. This exclusion only applies to gains accrued on investments made through an Opportunity Fund. There is no permanent exclusion possible for the initially deferred gain.
EIG provides a great analysis of the benefits of Opportunity Zones investment, see EIG’s Opportunity Zones Fact Sheet.
Q4 – What is a Qualified Opportunity Fund (QOF)?
A4 - It is any private sector investment fund organized as a corporation or partnership with the purpose of investing in Opportunity Zone assets. Any entity, from large corporations, community redevelopment, financial institution, venture capital, individual, or a real estate developer consortium can establish a fund as long as they follow the guidelines set out by the statute and IRS.
If interested in setting up a fund, we suggest our partners at Eazy Do it as a potential resource.
Q5 – I have capital gains and know of a project in an Opportunity Zone can I invest directly in the project?
A5 – No, the IRS rules requires a QOF to make the investment.
Q6 - How long does a taxpayer have to invest capital gains in a QOF?
A7 - Beginning on the date of the sale that results in some capital gain, a taxpayer has 180 days to reinvest the amount of gain to be deferred in a QOF. The taxpayer will then make an election on his or her tax return to defer the gain. For example, if the taxpayer sold stock in 2018, the election would be made on the 2018 tax return.
Q7 - How much gain can be deferred?
A7 – This is really important; the taxpayer can elect to defer as much or as little gain as they choose. There is no limit on the amount of gain that can be deferred. All past programs had limits.
Q8 - What about ordinary income from the original sale?
A8 - Qualified opportunity zone tax benefits only apply to capital gains, not to ordinary income. If a transaction produces both ordinary income and capital gains, the entire gain can still be invested in an Opportunity Zone if the taxpayer elects to do so, but only the capital gain amount will be eligible for the Opportunity Zone tax benefits.
Q9 - Can Opportunity Zones tax incentives be realized beyond 2026?
A9 - The tax incentive itself does not expire in 2026. Investors in Opportunity Funds that hold investments for at least 10 years will still be able to take advantage of the favorable tax treatment of gains related to the investments into Opportunity Funds, even if realized after 2026.
Q10 - How is this program not just a vehicle for gentrification?
A10 - Unlike many state-level programs, there are no requirements included regarding number of jobs, amounts of wages, or a certain percentage of hires of residents within the designated opportunity zone. US Senator Tim Scott & US Senator Cory Booker had gentrification in mind when the legislation was drafted. The language is very clear about creating benefits for businesses within OZs. We believe the intent of this language is for existing residents to have an opportunity to gain new & meaningful employment and not be forced to relocate.
Another great FAQ is located here