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August 16, 2021

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Opportunity Zones: Understanding this nuanced tax incentive

Congress created Opportunity Zones through the 2017 Tax Cuts and Jobs Act as a way to encourage taxpayers to invest in economically distressed areas. As a significant tax incentive, Opportunity Zones give investors the ability to defer – or in some cases, significantly reduce – capital gains taxes on certain investments. Numerous regulations and strict deadlines apply, however.

The basics of investing in Qualified Opportunity Funds

To qualify for deferred or reduced capital gains taxes, investors must hold long-term investments in Qualified Opportunity Funds (QOF). Their tax benefits depend on the length of time they hold the investment.

Investing eligible gains into a QOF must be done within 180 days after realizing those gains. So, for example, if a taxpayer sells assets, resulting in capital gains, they can reinvest those assets into a QOF within 180 days to defer and potentially reduce their capital gains liability.

How to start a QOF

There are multiple Opportunity Zones across Texas in addition to thousands nationwide. Investors don’t need to live or work near an Opportunity Zone in order to invest in or start a QOF.

Starting a QOF requires meeting several detailed requirements, including:

  • Filing an initial and annual certification with the IRS
  • Certifying that at least 90% of the fund’s assets are held in Opportunity Zone properties or businesses (or paying a penalty)
  • Reporting all dispositions or disposals of equity interests in the QOF

There are also detailed regulations concerning what counts as an Opportunity Zone property or business.

Investors, QOF founders, and tax preparers are wise to understand the intricate tax regulations that govern these incentives. Consider working with a knowledgeable tax attorney to ensure compliance and avoid adverse outcomes in audits or investigations.

IRS