Qualified Opportunity Zones were created by the 2017 Tax Cuts and Jobs Act. These zones are designed to spur economic development and job creation in distressed communities throughout all 50 States, District of Columbia, and the five U.S. territories by providing tax benefits to investors who invest eligible capital into these communities. Taxpayers may defer and reduce tax liability on eligible capital gains by making an appropriate investment in a Qualified Opportunity Fund (QOF) and meeting other requirements.
Click here to view the legislative language creating Opportunity Zones.
Under the proposed regulations, to qualify for deferral:
- Capital gains (short-term or long-term) must be invested in a QOF within 180 days.
- Taxpayer elects deferral on Form 8949 and files with its tax return.
- Investment in the QOF must be an equity interest, not a debt interest.
| Investment Length | Benefits Received |
| Fewer than 5 years | Deferred tax payment on original capital gains until December 31, 2026 or the date that the QOF investment is sold or exchanged (whichever date is earlier) |
| 5-7 years | Deferred tax payment on original capital gains until December 31, 2026 or the date that the QOF investment is sold or exchanged (whichever date is earlier) AND 10% reduction in the amount of the original capital gains when the deferral ends and they are subject to tax |
| 7-10 years | Deferred tax payment on original capital gains until December 31, 2026 or the date that the QOF investment is sold or exchanged (whichever date is earlier); AND an additional 5% reduction (total of 15%) in the amount of the original capital gains when the deferral ends and they are subject to tax |
| Greater than 10 years | Permanent tax exclusion of the appreciation in the QOF investment (the initial value of which was the amount of the original capital gains, which were deferred) |
If a taxpayer holds its QOF investment for at least five years (prior to December 31, 2026), the taxpayer may exclude 10 percent of the original deferred gain from being taxed. If a taxpayer holds its QOF investment for at least seven years (prior to December 31, 2026), the taxpayer may exclude an additional five percent of the original deferred gain (for a total exclusion of 15 percent of the original deferred gain) from being taxed. The original deferred gain – less the amount excluded due to the five- and seven-year holding periods – is recognized on the earlier of sale or exchange of the investment, or December 31, 2026. If the taxpayer holds the investment in the QOF for at least 10 years, the taxpayer may elect to increase its basis of the QOF investment to be equal to its fair market value on the date that the QOF investment is sold or exchanged. This may eliminate tax on appreciation on the QOF investment (IRS Tax Tips).
