Congress created Opportunity Zones under the Tax Cuts and Jobs Act of 2017 as an economic development tool to encourage investment in distressed areas.
The Act created three main incentives to spur capital investment, providing the following benefits to investors:
• An investor is able to defer eligible capital gains until the sunset of the program, which is December 31, 2026, resulting in the deferred tax being payable in 2027. In order to qualify for this deferral of tax, the eligible capital gains must be invested within 180 days.
• An investor is able to exclude any gains on the appreciation of the investment in the Qualified Opportunity Zone, provided the investor holds the investment for ten years. For example, if an investor were to invest $100 in a Qualified Opportunity Zone fund and that $100 appreciates to $150 in 10 years, the $50 appreciated is not taxable.
• The final incentive included an ability to receive a basis step-up, but the time period to qualify for those basis step-up incentives has expired.
There are different ways that you can invest in Opportunity Zones, including contributing to an existing Qualified Opportunity Fund, or establishing your own Qualified Opportunity Fund, which requires satisfying several requirements.