The Qualified Opportunity Zones (QOZs) were established at the Federal level in the Tax Cuts and Jobs Act of 2017. Note that there might be also Opportunity Zones at the State and Local level with different tax advantages, so do not mix them but you could take advantage of several of them.

The QOZs were nominated by the States and approved by the U.S. Department of the Treasury to provide special tax incentives to promote investments in those areas (over 8,700 zones).

To make an investment on a QOZ, you need to file the Form 8997 annually to report the investments and it will be reported as Qualified Opportunity Funds (QOFs), which are specialized investment vehicles. The investment has to have assets 90% in QOZ and to be considered QOZ business, 50% of gross income should be generated in the QOZ area.

The main tax advantage is the deferral of the capital gain taxes by the inclusion event (sale of the investment) or December 31, 2026. A secondary benefit is the reduction of deferred taxes depending on the holding period of the investment [1) five years, basis increased 10%, 2) seven years, basis increased 15% and 3) 10 years, basis matches the fair value].

The rationale for QOZ is to promote private investments in underserved or low income communities which would spur economic growth by creating jobs and revitalizing distressed areas.

Note that as the Tax Cuts and Jobs Act might be extended under Trump’s second mandate, there might be an extension of the current deadline of December 31, 2026 and other dates applicable to these types of tax advantage investments.

Our recommendation is to ensure that you file annually the 8997 form to take advantage of the tax benefits and consider the return of investment of any potential opportunity (just tax avoidance might not be reason enough if the return of investment is not enough)

IRS Link  – Invest in a Qualified Opportunity Fund

 

Bonus – If you do not meet the 90% QOF investment standard (i.e. failing the 90% assets test if you hold too much cash), then, you can get a hefty penalty (short-term federal rate plus 3%). There might be situations that might qualify as reasonable cause removing the penalty (i.e. death or serious illness, unavoidable absence, etc.)

Link The Tax Adviser – Opportunity zone penalties: What constitutes reasonable cause?