The 2017 Tax Cut and Jobs Act created the federal Qualified Opportunity Zone (QOZ) program that offers flexible tax savings and diversification tools for taxpayers generating large capital gains. The goal of the program is to spur investments in economically challenged areas in order to promote business growth and economic revitalization, thereby providing social, community, and individual resident benefits. Individuals, C and S Corporations, REITs, partnerships, trusts, and other pass-through entities can sell their appreciated capital assets (both short-term and long-term) and elect to reinvest all or a portion of the capital gain income into Qualified Opportunity Funds (QOF).
To participate in the QOZ program, the taxpayer must generally roll all or a portion of their short-term or long-term capital gain into a QOF within 180 days of the recognition date of the gain. However, final regulations extend that period under certain fact patterns, including capital gains reported on Form K-1s. The QOF must then timely invest the deferred gains into undeveloped or developed real estate, a new or existing QOZ-based business, or other qualified QOZ property.
How it Works:
A taxpayer investing $1,000,000 of deferred tax gain into a QOF on June 30, 2018, will start with a $0 tax basis in the QOF since the gain has not been recognized. On July 1, 2023, after meeting the 5-year holding requirement, the taxpayer will receive a 10% step-up to $100,000, leaving $900,000 of deferred tax gain; on July 1, 2025, the 7-year step-up of an additional 5% will bring the cumulative tax basis to $150,000 and lower the deferred gain to $850,000. On December 31, 2026, or an earlier disposition, the deferred gain of $850,000 will be includable in the taxpayer’s 2026 tax return, and their QOF tax basis will then be $1,000,000 ($150,000 basis step-up plus the $850,000 deferred gain recognized). Note that these basis adjustments are no longer available for new QOF investments, but likely will be reintroduced as Congress considers an extension and/or expansion of the OZ Program.
Once the investor has held the QOF for at least ten years, the tax basis in the QOF will fluctuate with the changing fair market valuations, and the taxpayer can elect to exempt the post-investment federal tax gain upon disposition for as long as 2046 – allowing decades of potential tax-free appreciation.
Click here to view the Opportunity Zones Map.
To request your copy of Investor's Guide to Opportunity Zones, please complete the following form. The guide will be available Spring of 2025, and completion of this form will ensure you are one of the first to receive the PDF!
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