The TJCA (Tax Cuts and Job Act) signed into law in 2017 introduced Opportunity Zone tax incentives. Investors in designated QOZ (Qualified Opportunity Zones) enjoy preferential treatment when they pay their federal tax. This stimulus spurs growth in low-income, distressed communities, which investors traditionally gave a wide berth.

To invest in these areas and reap the benefits, you need to be part of a QOF (Qualified Opportunity Fund). A QOF is an investment channel set up by a corporation or partnership for the sole purpose of investing in opportunity zones. You can be part of a QOF that invests in real estate and infrastructure, among other sectors in this QOZs. There are over 8,700 QOZs scattered all over the US and its territories. The unifying factor being that these QEZs are marginalized as compared to their immediate neighbors or statewide.

QOFs and QOZBs

QOFs must have more than 90% of their assets in the QOZs or invest in QOZBs. QOZBs are Qualified Opportunity Zone Businesses.

QOZBs are businesses that have more than 70% of their tangible assets located in the QOZ. More than 50% of their gross income must come from active business in the QOZ. A company could file for QOZB status if 50% or more of the aggregate amounts for services they paid were procured from the QOZ.

Some types of businesses are exempt from being classified under QOZBs. Generally, “Sin businesses” like gambling, liquor stores, massage parlors, and so on are prohibited from claiming QOZB status. 95% or more of the assets of the QOZBs should be non-qualified property.

Benefits of Opportunity Zones tax incentives

The tax incentives are structured in three ways.

Deferral of tax. Suppose you invest the capital gains from the sale of any property into a QOF within 180 days of the conclusion of the sale. In that case, you get a tax deferral until December 31, 2026, or the QOF’s disposition, whichever is earlier. You can choose to defer the gain in part or as a whole by filing Form 8949 with the IRS.

Reduction of tax. If you invest a capital gain in a QOF before December 31, 2021, and you retain this investment until beyond December 31, 2026, you will reduce the amount of the gain on which you owe taxes. This is due to a step-up basis equal to 10% of the original gain amount.

Elimination of tax. If you hold your QOF investment for at least ten years, you pay no tax on the appreciation of your QOF investment upon disposition. This elimination is applied regardless of the potential profit.

Investments always involve risk, and investing in opportunity zones is no different. You need to be keen on ensuring that the QOF you select has proper structures and proven experience in real estate.

The experience of your QOF managers should be pertinent to the opportunity zones; the QOF is planning to invest. Conditions and risks vary widely from state to state and may affect the performance of your investment.

The benefits outlined also depend on the future performance of your QOF’s investments. Your investment may yield some or all of these benefits.