An Opportunity Zone is an economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment. Localities qualify as Opportunity Zones if they have been nominated for that designation by the state and that nomination has been certified by the Secretary of the U.S. Treasury via his delegation of authority to the Internal Revenue Service.
A Qualified Opportunity Fund is an investment vehicle that is set up as either a partnership or corporation for investing in eligible property that is located in a Qualified Opportunity Zone.
Funds can make equity investments in or purchase the stock of a company if substantially all of the company’s tangible property is and remains located in an Opportunity Zone. Funds can take interests in partnerships that meet the same criteria. Funds can also invest directly in qualifying property, such as real estate or infrastructure, if the property is used in the active conduct of a business and if either the original use of the property commences with the fund or the fund substantially improves the property. Treasury has yet to release guidance on the substantial improvement test.
An investor that wants to participate in the Opportunity Zone program must:
- sell an asset
- realize a capital gain
- elect to roll all, or a portion, of the realized gain into a QOF
- election must be made within 180 days from the sale of an asset
If an investor holds it’s investment in a QOF for:
- 5-7 years, a decrease in original capital gains tax owed by 10%
- 7-10 years, a decrease in original capital gains tax owed by 15%
- 10+ years, a decrease in original capital gains tax owed by 15% PLUS permanent exclusion of capital gains once asset is disposed