Tax Benefits of Investing in a Qualified Opportunity Zone Fund

Tax Benefits of Investing in a Qualified Opportunity Zone Fund

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SUMMARY: Qualified Opportunity zone funds have the opportunity to make long-term investments. As many areas benefit from the program, there are tax benefits that investors are handed via the program.

There are some tax benefits to be enjoyed by real estate investors who re-invest through opportunity zones. Investors who have returned from the sale of real estate or other investments by 31 December 2026 are eligible to re-invest their capital gains into a qualified opportunity fund. The investments should also impact the improvement of the property with expenditures directly derived from the qualified opportunity fund. However, a qualified investor will enjoy tax benefits from the reduced capital returns, which can be long-lasting and suitable for corporations and individual investors.

Types of tax benefits Temporary Deferral This is the shortest deferral period under this program. Temporary deferrals imply that you can exclude any gains from the sale or exchange of your property from your gross capital gains—if the sale is to an unrelated person. The deferral eligibility relies on the 180-day period, which starts on the date you make the sale or exchange.

The Step-up in basis

Investors can enjoy a step-up in tax benefit when they re-invest their basis for capital gains in an opportunity fund. Investors have to factor in the increment of the basis, which is usually by 10 percent if they hold their opportunity fund zone investment for a period, not less than five years. Suppose the taxpayer holds the investment in an opportunity zone real estate fund for an additional two years, the basis increases by five percent. The basis increment in the step-up would see investors get tax exemption on 15 percent of their initial investments.

A practical example of how a step-up in basis would work If you have a $1 million capital gain in a Qualified opportunity zone fund, after five years, you will get 10 percent of $1 million capital gain deferred, giving you a basis of $100,000. If you retain the investment for an extra two years, you will be given an additional $50,000, which makes a total of $150,000, amounting to 15% of the $1 million capital gain.

Permanent Tax Exclusion When an individual holds their investment in the opportunity zone real estate fund for 10 years or more, when they decide to sell, they are accorded a permanent exclusion from taxable income for the original capital gains they invested in the opportunity fund.

However, this benefit only works for qualifying investments. If you believe you are an eligible investor, your deferral requests need to go through the proper channels to enjoy the best this opportunity has to offer.

180-day investment periods All investors who wish to invest their gains in a qualified opportunity fund have up to 180 days to actualize—the first day being the date when a sale or exchange was made from a property—when the gain would be considered for income tax obligations.

Opportunity zones investment is still an emerging aspect. Hence the investments and tax implications are seemingly complex to understand. Therefore, every investor is urged to discuss future possibilities and ramifications with their tax advisors or investment investors who are more knowledgeable on such matters.