Qualified Opportunity Zones: Benefits
What are the potential benefits of Qualified Opportunity Zone funds?
Qualified Opportunity Zone (QOZ) funds are investment vehicles designed to encourage long-term private capital investment in economically distressed communities. Investors who reinvest eligible capital gains into a QOZ fund may receive federal tax advantages, and projects must be located within designated Opportunity Zones.
Potential tax benefits
An individual who invests eligible capital gains in a QOZ fund may receive:
- Deferred taxation on the original capital gain
Taxes on the reinvested gain are deferred for a period of up to five years after the date of investment (or until the investment is sold, whichever comes first). There is no fixed deferral deadline tied to a specific calendar year. - A basis step-up on the deferred gain
After a five-year holding period, investors receive a 10% step-up in basis on the deferred gain.
Certain qualifying rural QOZ investments may receive up to a 30% basis step-up under the new rules. - Complete elimination of tax on future appreciation
If the QOZ investment is held for at least 10 years, any appreciation in value after the initial investment can be excluded from federal taxes when the investment is sold. For investments held 30 years or longer, the basis step-up is capped at fair market value on the investment’s 30th anniversary.
Long-term growth potential
Many investors use QOZ funds to pursue long-term growth in communities that may offer redevelopment or expansion opportunities. Billions of dollars have been raised since the program began, and the revised laws make QOZs a continuing part of the federal tax code rather than a temporary program. These long-term incentives are designed to encourage patient capital in areas that historically lack private investment.
Simpler than a like-kind real estate exchange
While every strategy serves different planning goals, some investors choose QOZ funds instead of traditional real estate reinvestment structures because:
- Investors only need to reinvest eligible capital gain, not the full sale proceeds.
- There is no 45-day identification period and no Qualified Intermediary requirement.
- QOZ investments can be made from the sale of any capital asset (stock, business sale, real estate, crypto, etc.), not just real property.