Opportunity Zones Frequently Asked Questions

A QOZ is an economically distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment.  Localities qualify as QOZs if they have been nominated for that designation by a state, the District of Columbia, or a U.S. territory and that nomination has been certified by the Secretary of the U.S. Treasury via his delegation of authority to the Internal Revenue Service (IRS).

QOZs were added to the tax code by the Tax Cuts and Jobs Act on December 22, 2017.

No.  The first set of QOZ designations, covering parts of 18 states, were designated on April 9, 2018.  QOZs have been designated to cover parts of all 50 states, the District of Columbia, and 5 U.S. territories.

QOZs are an economic development tool—that is, they are designed to spur economic development and job creation in distressed communities.

QOZs are designed to spur economic development by providing tax incentives for investors who invest new capital in businesses operating in one or more QOZs.

• First, an investor can defer tax on any prior eligible gain to the extent that a corresponding amount is timely invested in a Qualified Opportunity Fund (QOF).  The deferral lasts until the earlier of the date on which the investment in the QOF is sold or exchanged, or December 31, 2026.  If the QOF investment is held for at least 5 years, there is a 10% exclusion of the deferred gain.  If held for at least 7 years, the 10% exclusion becomes 15%. 
• Second, if the investor holds the investment in the QOF for at least 10 years, the investor is eligible for an adjustment in the basis of the QOF investment to its fair market value on the date that the QOF investment is sold or exchanged.  As a result of this basis adjustment, the appreciation in the QOF investment is never taxed.  A similar rule applies to exclude the QOF investor’s share of gain and loss from sales of QOF assets. 

No.  You can take advantage of these tax incentives even if you don’t live, work, or have an existing business in a QOZ.  All you need to do is invest the amount of a recognized eligible gain in a QOF and elect to defer the tax on that gain.

A QOF is an investment vehicle that files either a partnership or corporate federal income tax return and is organized for the purpose of investing in QOZ property.

Gains that may be deferred are called “eligible gains.”  They include both capital gains and qualified 1231 gains, but only gains that would be recognized for federal income tax purposes before January 1, 2027, and that are not from a transaction with a related person.  For you to obtain this deferral, the amount of the eligible gain must be timely invested in a QOF in exchange for an equity interest in the QOF (qualifying investment).  Once you have done this, you can claim the deferral on your federal income tax return for the taxable year in which the gain would be recognized if you do not defer it.

Yes.  You can transfer property other than cash to a QOF.  However, a transfer of non-cash property may result in only part of the investment being a qualifying investment (that is, only part of the investment can benefit from the QOZ tax incentives).  Specifically, the amount of gain that can be deferred is limited to the basis of the contributed property, even if a greater value of property is transferred.

No.  Your holding period of property transferred to a QOF doesn’t transfer to your qualifying investment in the QOF for purposes of the QOZ tax incentives.

Generally, you have 180 days to invest an eligible gain in a QOF.  The first day of the 180-day period is the date the gain would be recognized for federal income tax purposes if you did not elect to defer the recognition of the gain.

An investor must include the remaining deferred gain on the earlier of an inclusion event or December 31, 2026.  The amount of deferred gain included in income depends on (i) the fair market value of your qualifying investment in the QOF on the date of the inclusion event and (ii) adjustments to the tax basis of that qualifying investment.

An inclusion event, in general, is an event that reduces or terminates your qualifying investment in a QOF.

When the QOF liquidated, the deferral period ended.  You must include the deferred gain in the taxable year during which your QOF liquidated.  When you file your federal income tax return for that year, you must report the gain and must reflect the change to your QOF investment.

Yes.  Giving away your qualifying investment in the QOF is an inclusion event, which ends the deferral period.  When you file your federal income tax return, you must report the deferred gain related to the QOF investment.  Your child has a non-qualifying investment.

No.  Because you are treated as the owner of the trust for federal income tax purposes (that is, because it is a grantor trust), the transfer is not an inclusion event and so does not end the deferral period.  A transfer of a qualifying investment to a non-grantor trust is an inclusion event, which ends the deferral period.