U.S. investors have a lot of options. It’s important to find those that will offer not just good returns, but also minimal tax burdens. For investors who have substantial capital gains and want to save money by deferring capital gains taxes, opportunity zones present an excellent opportunity. Read on to find answers to nine of the most frequently asked questions about opportunity zones to learn why.
- What Is an Opportunity Zone?
Qualified Opportunity Zones (QOZs) are areas where new investments may be eligible for tax exemptions or other preferential treatment. The idea of QOZs was introduced in 2017 and the first set of them was designated in 2018. Their purpose is to act as an economic development tool to create jobs and spur development in distressed communities.
- How Were Opportunity Zones Selected?
State governors nominated up to 25% of their states’ lowest-income community census tracts for inclusion. This means all QOZs are areas that have poverty rates of at least 20% or median family income rates that are less than 80% of those found in surrounding areas. The nominated communities were chosen and certified by the Treasury Department via the IRS.
- What Incentives Are There to Invest?
Investing in QOZs offers three core tax incentives. Investors can temporarily defer the inclusion of capital gains in taxable income by reinvesting it into an opportunity zone fund (OZF) linked to a QOZ. If investors keep their money in an OZF for at least seven years, they can exclude up to 15% of their original deferred capital gains from taxation. If they hold the investment for 10 years, they can get a permanent exclusion of the capital gains for the sale or exchange of their investments, although there is no permanent exclusion for initial deferred gains.
- When Are the Taxes on Invested Deferred Gains Due?
All capital gains taxes deferred through this program are due when the investment is sold. If an investor holds his or her investment in an OZF until December 31, 2026, the taxes will be due on this date.
- Do All Investments into QOZ Businesses Qualify for Tax Incentives?
The simple answer here is no. Only money invested in an approved OZF will qualify for tax incentives.
- What Types of Investments Can OZFs Make?
Most investments made through the QOZ program focus on real estate. However, there are other eligible investments. These include investments in natural resources, transport hubs, and manufacturing in QOZs.
- Can OZFs Invest in Multiple QOZs?
OZFs can invest in multiple QOZs. The only real regulation is that all OZFs must invest at least 90% of their assets in QOZ properties.
- What Type of Capital Gains Can Be Invested?
Short-term and long-term capital gains can both be invested in OZFs. This includes capital gains from the sales of property, stocks, bonds, and interests in partnerships.
- How Does the Community Benefit?
Communities living in QOZs benefit just as much as, if not more than, investors. QOZs create jobs that can be held by community members, improve access to infrastructure and services, and give struggling local economies a much-needed boost.
The Bottom Line
Investing capital gains into an OZF is a great way to reduce tax liabilities while simultaneously helping impoverished communities. Find out more about this investment opportunity or start looking for qualified opportunity zones by getting in touch with a wealth manager or a financial advisor as soon as possible.