Opportunity Zone FAQ's

An Opportunity Zone or Opportunity Zones (Qualified Opportunity Zones) are located in what we consider to be low-income census tracts, or areas adjoining low-income census tracts. 

Approximately 8,700 Qualified Opportunity Zones were nominated and approved by the Governors of each State, District, and/or U.S. territory and subsequently then certified by the Department of The U.S. Treasury. 

Qualified Opportunity Zones can be found in all 50 states, and comprise approximately 12% of all U.S. Territories 

Qualified Opportunity Zone Benefits can be found in at least one major metropolitan area in each state, with the specific low-income census tracts designated as QOZs strategically located throughout rural areas to help promote local Economic Development.

Opportunity Zones Tax Benefits can be found when a capital gain is invested appropriately in a Qualified Opportunity Zone Fund (QOF) and include three primary benefits:

1. Tax Deferral: You can elect to defer the capital gain you invest until the earlier of December 31, 2026 or whenever you sell your qualified fund investment.
2. Step-Up Benefits: You can get a step-up in the capital gain you are deferring if you invest long-term. If you hold the investment for five years, you get a 10% step-up. If you hold it for seven years, you get an additional 5% step-up, for 15% total. This means you could potentially not pay tax on 15% of the capital gain that you invested in a QOF.
3. No Capital Gain Tax on Appreciation: If you hold the QOF investment for 10 years or more, there is no tax on the capital gain when you sell your QOF investment on any appreciation that has occurred from the initial time of the investment. This means that if you invest $1 million dollars today in a QOF and the investment is worth $3 million 10 years from now, then the $2 million increase is basically tax free.

How an Opportunity Zone is Established starts with a Qualifications process. 

To become a qualified Opportunity Fund, an eligible taxpayer self-certifies by completing a form (Form 8996) and submitting the form with the taxpayer’s federal income tax return for the taxable year. The IRS has released a draft of the certification form as well as draft instructions.

Opportunity Funds must hold at least 90 percent of their assets in qualifying Opportunity Zone Property (defined below), and will be tested at the 6-month and year-end points to ensure compliance (final guidance on the initial timing of this test is forthcoming).

An Opportunity Zone Fund can Invest in Multiple Opportunity Zones with at least 90 percent of its assets being held in Qualified Opportunity Zone Property, whether in one Opportunity Zone or across multiple Opportunity Zones.

Treasury is given broad authority to promulgate rules and regulations to prevent abuse of the incentive, and the Department is currently in the process of writing those rules. The statute itself includes several provisions designed to mitigate the potential for abuse and market distortion.

Investors cannot simply park their money in real estate, for instance, since investors in used property are required to substantially improve it in order to receive benefits from the incentive.

Treasury will conduct twice-yearly tests to ensure funds maintain at least 90 percent of their assets in qualified property and levy penalties for violations. 

In addition, standard related party restrictions apply to all zone and fund transactions. 

Tangible property and active conduct tests will prevent zones from being used as patent boxes, and entities whose assets are primarily financial, such as banks, funds of funds, or holding companies, are not eligible for investment.

The U.S. Department of the Treasury released initial proposed guidance on October 19, 2018, which can be found here.

A public hearing to discuss the proposed guidance and submitted comment letters is expected to be scheduled for early 2019, with subsequent rounds of regulations expected to released later in the year.

A summary of the proposed guidance can be found here.

EIG has also submitted two comment letters, the first in June 2018 requesting specific guidance prior to Treasury’s release of their initial rulemaking, and the second comment letter in December 2018 responding to the proposed regulations.

These comment letters can be accessed here and here, respectively.

Stakeholders should expect several tranches of regulatory guidance taking different forms to be issued as the market matures.

EIG is a policy and advocacy focused organization, and as such, does not make or facilitate investments. EIG provides information about the Opportunity Zones incentive and how it works, as well as data about the designated zones. We are committed to working with all involved stakeholders–from investors to entrepreneurs, public sector leaders, philanthropies, and non-profits–to raise awareness and nurture this new ecosystem into existence.

No, they are new. The first set of opportunity zones, covering parts of 18 states, were designated on April 9, 2018. opportunity zones have now been designated covering parts of all 50 states, the District of Columbia and five U.S. territories.

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

Opportunity zones are designed to spur economic development by providing tax benefits to investors. First, investors can defer tax on any prior gains invested in a Qualified Opportunity Fund (QOF) until the earlier of the date on which the investment in a QOF is sold or exchanged, or December 31, 2026. If the QOF investment is held for longer than 5 years, there is a 10% exclusion of the deferred gain. If held for more than 7 years, the 10% becomes 15%. Second, if the investor holds the investment in the Opportunity Fund for at least ten years, the investor is eligible for an increase in the basis of the QOF investment equal to its fair market value on the date that the QOF investment is sold or exchanged.

No. You can get the tax benefits, even if you don’t live, work or have a business in an opportunity zone. All you need to do is invest a recognized gain in a Qualified Opportunity Fund and elect to defer the tax on that gain.

The numbers are the population census tracts designated as Qualified Opportunity Zones.

You can find 11-digit census tract numbers, also known as GEOIDs, using the U.S. Census Bureau’s Geocoder. After entering the street address, select ACS2015_Current in the Vintage dropdown menu and click Find. In the Census Tracts section, you’ll find the number after GEOID

You may make an election to defer the gain, in whole or in part, when filing your 2018 Federal Income Tax return. That is, you may make the election on the return on which the tax on that gain would be due if you do not defer it. For additional information, see How To Report an Election To Defer Tax on Eligible Gain Invested in a QO Fund in the Form 8949 instructions.

Yes, but you will need to file an amended return, using Form 1040-X and attaching Form 8949.

When the QOF dissolved, the deferral period ended, and you must include the deferred gain when you file your return, reporting the gain on Form 8949.

Yes. The deferral period ended when you gave away the QOF investment. You must include the deferred gain when you file your return, reporting the gain on Form 8949.

Yes. If a taxpayer’s section 1231 gains for any taxable year exceed the section 1231 losses for that year, the net gain is long-term capital gain. A taxpayer can elect to defer some or all of this capital gain under section 1400Z-2 by making an investment of a corresponding amount in a Qualified Opportunity Fund (QOF) during the 180-day period that begins on the last day of the taxpayer’s taxable year.

Yes. Under these facts, because your tax year ended before May 1, 2019, your QOF investment can support a valid deferral election. Making that election will not impair your ability consistently to rely on all other aspects of proposed regulations published on May 1, 2019.

Yes. A taxpayer can transfer property other than cash as an investment to a QOF. However, a transfer of non-cash property may result in only part of the investment being eligible for opportunity zone tax benefits, so that not all of the taxpayer’s capital gain is able to be deferred. See proposed regulations §1400Z2(a)-1(b)(9) & (10).

To become a Qualified Opportunity Fund, an eligible corporation or partnership self-certifies by filing Form 8996, Qualified Opportunity Fund, with its federal income tax return. For additional information, see Form 8996 and its instructions. The return with Form 8996 must be filed timely, taking extensions into account.

Yes. An LLC that chooses to be treated either as a partnership or corporation for federal tax purposes can organize as a Qualified Opportunity Fund.

No. The opportunity zones tax incentives provisions determine a taxpayer’s holding period in a qualifying investment in a QOF without regard to the holding period of the cash or other property transferred to the QOF

QOF in an acronym for Qualified Opportunity Fund.