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You Asked, We Answer: All About OZs

You Asked, We Answer: All About OZs

Are you interested in Opportunity Zone investments, and looking to learn more? We’ve curated a list of the top questions we’ve heard from potential OZ investors. From the basics to specifics about tax benefits, we’ve got you covered with this OZ FAQ.

 

Question: What is an Opportunity Zone?

Answer: An Opportunity Zone is the term used for one of the 8,766 low income census tracts designated by the IRS to be eligible for special tax benefits for investors. To have been considered eligible for Opportunity Zone status, a census tract had to meet the federal definition of a low-income community. This means that it has a poverty rate of 20% or more, or a median family income at 80% or less of the state median family income. 25% of low income community census tracts were eligible to be designated as Qualified Opportunity Zones by the IRS. 

 

Question: What types of gains are eligible for deferral if I invest a capital gain with a Qualified Opportunity Fund?

Answer: Any gain that would be eligible for taxation for federal income tax purposes before January 1, 2027. The gain cannot be from a transaction with a relative. Commonly, Opportunity Zone (OZ) investments are made with the capital gains from the sale of stocks, crypto or real estate. 

 

Question: What are the benefits for investing in an Opportunity Zone?

Answer: Currently, there are two tax benefits for investing in Opportunity Zones:

  • Temporary Deferral: When you invest a capital gain in a Qualified Opportunity Fund (QOF), you can defer the tax on your gain until december 31, 2026 or until you dispose of the investment. This means your whole gain can go to work for you and the qOF you invest in. 
  • Permanent Exclusion: When OZ investments are held for 10 years or more, the capital gains from the sale of the investment is permanently excluded from taxation. This is the crown jewel of tax incentives for OZ investments. 

Question: Do I need to live in a QOZ to take advantage of the tax advantages for investing in one? 

Answer: Nope! The only requirements to reap the benefits of OZ investing is that the investment be made into a Qualified Opportunity Zone. Your location has no bearing, so you are free to choose any OZ throughout the US and its territories for your investment. 

 

Question: What is a Qualified Opportunity Fund?

Answer: A Qualified Opportunity Fund is a private investment vehicle set up as either a corporation or partnership with the specific purpose of investing in Qualified Opportunity Zones. To qualify as a QOF, the fund must have at least 90% of its assets allocated to OZ investments. 

 

Question: Who can create a Qualified Opportunity Fund?

Answer: Any individual taxpayer or entity can self-certify as a QOF. The program purposely allows for a very broad range of participation in funds to further enable broad investment from a variety of funds. Examples of entities who have commonly created QOFs include banks, community development financial institutions, individual taxpayers, and venture capital firms. 

 

Question: What is the process for becoming certified as a QOF?

Answer: It's easy! Simply self-certify your partnership or corporation as a QOF by filling out IRS form 8996, Qualified Opportunity Fund, with your federal tax return. This form will then be completed annually to demonstrate that your QOF met the investment standards to be a QOF each year. 

 

Question: What can a Qualified Opportunity Fund invest in?

Answer: Generally speaking, OZ investments can be made in businesses and real estate. QOFs can invest in new or expanding businesses, but so far the majority of investments are made in real estate. Mixed-use facilities, properties developed or repurposed for both multi-family housing and retail are very popular. However, investments can be made in infrastructure, industrial or just residential development. 

 

Question: How can I prepare to invest a capital gain in a QOF?

Answer: OZ FundHub is your best resource for learning about OZ investing and connecting with QOFs. Read more on our blog to keep up to speed with the latest in OZ tips and news. Attend one of our OZFH Connect events to hear pitches directly from QOFs. Or, use our fund finder tool to match with QOFs that meet your investment criteria. 

 

Question: How long do I have to make an investment in a QOF following a capital gain event?

Answer: You have 180 days from the realization of a capital gain to make your investment in a QOF. 

 

Question: How do communities benefit from Opportunity Zone investments?

Answer: OZ investments encourage private investment in distressed communities typically overlooked by investors. OZ investments promote development in these communities. They create job opportunities and new and expanded local businesses. They also provide new and affordable housing for the community. The requirement for long term holds for tax benefits acts as a guardrail against any investments that may be made for a quick sale but without real long term benefits. 

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