Opportunity zones can offer great tax incentives that encourage real estate investors to invest in underutilized and low-income communities. They have become even more popular recently so here are some of the most common questions that I get asked regarding opportunity zones.

What is a Qualified Opportunity Zone (QOZ)?

A QOZ is an economically-distressed community where if certain conditions are met, it may result in deferment of capital gains tax for investors.

What is a Qualified Opportunity Fund (QOF)?

“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.”

What are the benefits of buying property in an opportunity zone?

• You can exclude all appreciation on the original capital gains investment when you exchange or sell a property in an opportunity zone if you held it for more than 10 years.
• You are able to permanently exclude 10% of deferred gains from capital gains tax as long as you hold the property for at least 5 years and 15% if held for 7 years.
• Deferral of recognizing capital gains after the sale of a capital asset as long as the capital gains are invested in a QOF within 180 days of the property disposition. You are able to defer the gains until the property is sold or until December 31, 2026

How do I know which areas are considered opportunity zones?

The IRS has a list of QOZs. Here is the link.

What types of gains are eligible for deferral through QOF investing?

This includes both qualified 1231 gains as capital gains as long as the transaction is not with a related person. The gain just must be reinvested in a QOF within 180 days. Many think only capital gains from the sale of real estate are eligible, however you can even reinvest the gains from selling stock.

How do I elect to defer my gain?

You make this election when filing your federal income tax return. The election is made on Form 8949. Here are additional instructions for the form.

How do I start a QOF and can an LLC be a QOF?

You must self-certify by filing Form 8996 with the federal tax return for your corporation or partnership. Yes, an LLC that elects to be either a corporation or partnership for federal income tax purposes and is organized for the purpose of investing in a QOZ is eligible.

What does it mean if a property is “substantially improved”?

After the property is acquired, during any 30-month period, the additions to the basis need to exceed the adjusted basis at the start of the 30-month period.

What is the 50% of gross income test?

A QOZ must earn a minimum of 50% of its gross income on an annual basis from QOZ business activities. There are three safe harbors that businesses may use to meet the test.

• Half of the amount the business spent on services were for services performed in a QOZ.
• Necessary business functions and necessary tangible property was located in a QOZ.
• Half of the hours of service received by the business were performed in a QOZ.

A business does not need to meet all three safe harbors to qualify. Satisfying only one will qualify the business.

Where can I find more info on investing in a qualified opportunity fund?

Here’s a link!

Where can I find more info on getting certified and maintaining a qualified opportunity fund?

Here’s a link!

What other questions do you have about opportunity fund zones?