OPPORTUNITY ZONES

What are Opportunity Zones?

Qualified Opportunity Zones (QOZ) were added to the tax code through the Tax Cuts and Jobs Act (TCJA) on December 22, 2017, and are designated as economically-distressed communities where new investment, under certain conditions, may be eligible for tax deferment, discount and elimination.

 

 

Section 1400Z-2 of the Internal Revenue Code provides that individual, corporate and partnership capital gains of any kind can be deferred, and possibly reduced, if invested in a Qualified Opportunity Fund ("QOF") with-in 180 days of realizing the gain.

 

 

Over 8,700 Qualified Opportunity Zones (QOZs) have been designated  across the United States including 628 census tracts in the state of Texas.

 

Opportunity Zones Map

Why Invest in Opportunity Zones?

There are three substantial tax advantages for Opportunity Fund Investors:

Deferral of Capital Gains

Any capital gains can be invested into an Opportunity Fund. By investing in an Opportunity Fund, the invested capital gains do not need to be recognized when the investment is sold or exchanged, until December 31, 2026.

Reduction of Capital Gains

After holding an investment in the Opportunity Fund for 5 years, the capital gains tax on the original gain is reduced by 10%. After 7 years, the tax owed on the original gain is reduced by an additional 5%. This is the equivalent of a 15% step-up in basis on the initial investment.

No Capital Gains Tax on Fund Profits

If the Qualified Opportunity Zone investment is held for 10 years or more, the capital gains tax is eliminated upon sale of the Opportunity Zone Investment.

 

Opportunity Fund Timeline

By holding their shares in the Opportunity Fund for 10 years, investors are able to achieve maximum benefits from their investments into the fund.

January 1, 2019:

Capital Gain Triggered

February 1, 2024:

10% basis increase

December 31, 2026:

Original deferred tax liability recognized

February 1, 2019:

Investment in OZ Capital

February 1, 2026:

5% basis increase

February 2, 2029+:

Tax-Free withdrawal

 

QOF vs. Standard Portfolio After-Tax Return Comparison

How a capital gain of $100 reinvested in 2019 performs over time.

Deferral + 15% basis step-up + permanent exclusion of gains incurred through OpZone Investments

Deferral + additional 5% basis step-up

Deferral + 10% basis step-up

*This chart assumes a 23.8% Federal capital gains tax rate, no state income tax, and annual appreciation rate of 7% annually for both the OpZone Fund and a standard stock portfolio.

 

How to Invest

A Qualified Opportunity Fund (QOF) is an investment vehicle that is set up as either a partnership or corporation for investing in eligible property or businesses located in an Opportunity Fund.

QOFs are required to invest 90% of their assets in Qualified Opportunity Zone property and/or operating businesses. Capital Gains invested in a QOF must be utilized for equity in property or businesses, not debt.

A Qualified Opportunity Fund has 30 months to deploy working capital in a QOZ property or business in order for the capital gain deferment to be eligible for discount and elimination. QOFs have until December 31, 2047 to satisfy the 10-year holding period to step-up their basis in a QOF and exclude QOF gain.

QOFs must "substantially improve" a QOZ investment by deploying additional capital in the amount of the original purchase price of the investment.