How to Invest in Opportunity Zones

Have you recently sold property, stock, or crypto currency for a profit? If so, you may be looking for ways to eliminate or reduce your capital gain tax exposure. With the creation of the Opportunity Zone program, you can reinvest your capital gains while reaping unprecedented tax benefits. You’ll also be providing much needed capital to rehabilitate distressed communities throughout the United States. 

What are Opportunity Zones?

Opportunity Zones (OZs) were created by the Tax Cuts and Jobs Act of 2017 to incentivize private equity to work alongside the government to bring new development, business, jobs, and housing to distressed and underserved communities. Between April and December of 2018, 8,766 census tracts (click to here to view the OZ FundHub map) throughout the US were identified and designated as Opportunity Zones. To become an Opportunity Zone, a census tract must meet the federal definition of a low-income community. This means having a poverty rate of 20% or more or a median family income at 80% of the statewide or metro area median family income. In each state, 25% of low income census tracts were eligible to become OZs, and each state received at least 25 Opportunity Zones regardless of the number of low income census tracts. 

Tax Benefits of Opportunity Zone Investing

Tax incentives offered to Opportunity Zone investors are designed to mobilize an underutilized financial resource – unrealized capital gains. In the first few years of the program, partial reductions of taxes due on the capital gain were offered as a benefit for committing to OZ investments. The last of these early adopter benefits expired at the end of 2021, but the bulk of the program’s tax savings remain in play. 

The first tax incentive currently available to OZ investors is the deferral of the tax on the capital gain until the end of 2026. This means that rather than have the tax money go directly to the IRS, it can be reinvested and continue to make more money for a few years before the tax comes due. To ease the stress of needing to have cash available to pay the tax in 2027, many Qualified Opportunity Funds (QOFs) include a plan to refinance or distribution mechanism of some sort in time to pay out enough cash to investors to cover this tax bill. This may be a consideration for you if you choose to become an OZ investor.

Opportunity Zone investment is designed to reward investors for holding their investments long term. The idea is that this will entice investors and developers to be sure their projects are valuable, and make progress toward helping distressed communities fulfill housing needs, drive new business and create jobs. Additionally, and must lucratively, when OZ investments are held for at least 10 years, any appreciation on the investment is federally tax free with state-level capital gain exposure varying by state depending on whether or not the state has elected to conform with the program. This is the primary tax benefit for opportunity zone investors, and provides a tremendous value to investors looking to reinvest their capital gain. 

How to Invest in Opportunity Zones

Anyone with United States citizenship who experiences a capital gain can invest in an Opportunity Zone, but there are a few rules they will need to follow. First and foremost, investments must be made into a Qualified Opportunity Fund (QOF) within 180 days of the realization of the capital gain. A QOF is a tax incentivized investment vehicle for the special purpose of making Opportunity Zone investments. QOFs are generally easy to establish, the fund simply elects QOF status with the IRS when filing their federal taxes (Form 8996). They must also self-certify that at least 90% of their assets are held in qualified Opportunity Zone investments. 

Qualified Opportunity Funds can be as simple as a two partner LLC or they can be large multi-investor vehicles subject to regulation by the SEC. Most OZ investors will elect to invest in these larger funds, as they are typically raising capital from a larger investor pool and assume more responsibility for the management and development of the assets within the fund. Funds will typically specify the projects or types of projects they are planning, whether it is housing, commercial, mixed-use development, operating businesses etc. They will also usually state if they are single-asset or multi-asset (planning just one project or a portfolio of projects). They will usually have minimum investment requirements and a specific region/s they are targeting. Typical investment minimums range from $25,000-$100,000, with some funds requiring a minimum investment of $250,000 or more. 

Once you know that you will be experiencing a capital gain and you decide you are interested in investing in a QOF, you will want to learn more about the funds that make the most sense for you. OZ FundHub’s Fund Finder is a great tool designed to facilitate this process by matching you with specific funds that align with your personal investment criteria. Additionally, OZ FundHub offers the OZ Forum where you can interact with other investors, industry experts and fund managers. 

 *Important Notice: OZ FundHub is not a licensed tax, accounting, or financial firm. All Information contained is for educational purposes only.*