WHAT IS AN OPPORTUNITY ZONE?
A Qualified Opportunity Zone ("QOZ") is designated as an economically, distressed community where new investment, under certain conditions, may be eligible for tax deferment, discount, or elimination. More than 8,700 QOZs have been designated across the United States, with 628 located in Texas.
QOZs were added to the tax code on December 22, 2017, through the Tax Cuts and Jobs Act ("TCJA"). Section 1400Z-2 of the Internal Revenue Code provides that individual, corporate, and partnership gains of any kind can be deferred, and possibly reduced, if invested in a Qualified Opportunity Fund ("QOF") within 180 days of realizing the gain.
A QOF is required to invest 90% of its assets in a QOZ property and/or operating business. Capital gains invested in a QOF must be utilized for equity, not debt, in the respective property and/or business. A QOF must "substantially improve" a QOZ investment by deploying additional capital in the amount of the original purchase price of the investment.
Defer Capital Gains Tax
Any capital gains can be invested in a QOF. By investing in a QOF, the invested capital gains do not need to be realized when the investment is sold or exchanged until December 31, 2026.
Reduce Capital Gains Tax
After holding an investment of capital gains in a QOF for 5 years, the capital gains tax on the original gain is reduced by 10.0%. After a 7-year holding period, the tax owed on the original gain is reduced by an additional 5.0%. This is equivalent to a 15% step-up in basis on the original gain.
Eliminate Capital Gains Tax
If the QOZ investment is held for 10 years or more, the capital gains tax on the original gain is eliminated upon the sale of the QOZ investment.
*A QOF has 30 months to deploy working capital in a QOZ property and/or business in order for the capital gain deferment to be eligible for discount or elimination.
After-Tax Return Comparison: QOF vs. Standard Portfolio
How does a capital gain of $100 reinvested in a QOF perform over 10 years?
Excess Returns from QOF Investment
Standard Portfolio Returns
*The chart assumes a 23.8% federal capital gains tax, no state income tax, and annual appreciation of 7.0% for the QOF and the Standard Portfolio.