Opportunity zones were developed by the federal government, with nominations from state governments, to help create job growth and improve economic development in low-income or distressed communities by providing investors with an incentive to reinvest their capital gains into underdeveloped markets.
●There are more than 8,700 opportunity zones to choose from. There are more than 8,760 qualified opportunity zones across all of the 50 states, five U.S. territories, and the District of Columbia. The 2017 Tax Cuts and Jobs Act, also known as TCJA, developed the Opportunity Zone Program as a way to spur job creation and economic development with long-term investments in low-income or distressed areas.
●Three benefits of opportunity zone investing. Any individual or business with capital gains from the sale or exchange of an investment asset can get tax benefits for investing these capital gains into opportunity zones. One of the tax benefits is the deferral of tax payment on previously earned capital gains that are reinvested into opportunity zones until the end of 2026 or whenever the asset is sold. Also, the basis of the original investment increases by 10 percent if the opportunity zone investment is held for over five years. Extra capital gains that are made from the opportunity zone investment are excluded from the capital gains tax, as long as the investment is held for over 10 years.
●Main opportunity zone terms to understand. There are a few key opportunity zone terms that you should understand, including QOZ, QOF, and QOZP. QOZ refers to the qualified opportunity zone, which is a low-income community census tract nominated by each territory or state and approved by the United States federal government. QOF refers to the qualified opportunity fund, which is a partnership or corporation developed with the goal of investing equity into qualified opportunity zone properties. QOZP refers to a qualified opportunity zone property, which can be a real estate property, a business property, a corporate stock, or a partnership interest in a business entity primarily located in a qualified opportunity zone.
●Pay zero dollars in capital gains tax. The real tax benefit in QOZ investing typically comes after 10 years for long-term investors. After a 10-year holding period, the investment basis is stepped up to the fair market value, meaning that any appreciation can be sold free of tax. For example, if you have a $600,000 investment that has appreciated in value to $800,000 after being held for over 10 years, then the entire amount of appreciation would be considered tax-free. That being said, appreciation is not guaranteed with these investments.
●Anyone with a capital gain can invest in opportunity zones. Real estate investors have long benefited from 1031 exchanges, but capital gains from other investments were subject to taxation until the TCJA of 2018 was enacted. Currently, investors with capital gains from other assets like precious metals, businesses, real estate, stocks, and bonds can invest those capital gains into an opportunity zone to defer or eliminate some of the capital gains for tax purposes.