Qualified Opportunity Zones: Risks
What are the potential risks of Qualified Opportunity Zone funds?
Qualified Opportunity Zone (QOZ) funds involve significant risks, including tax and investment risks. Investors should understand these risks before investing, and they should consult their own tax advisor regarding individual circumstances. The discussion below is informational only and is not tax or legal advice.
Tax and regulatory risks
Compliance requirements remain complex
A project may fail to qualify as a QOZ investment if it does not meet strict rules regarding location, timing of capital deployment, business activity, or property improvement. If a fund does not meet these requirements, investors may lose some or all of the intended tax benefits.
Stronger reporting and oversight under the new rules
Recent legislation requires expanded reporting from both funds and businesses, including detailed disclosures on assets, employment, investment levels, and community impacts. Failure to comply can result in penalties to the fund that may affect investors.
Deferral benefits are limited by the holding period
Deferred capital gains are only postponed for up to five years after investment (or until the investor disposes of the fund interest). If an investment is sold before the required holding period, the investor will owe tax on the deferred gain plus any applicable basis adjustments.
Long-term holding requirements to achieve full benefits
Investors must hold their interest for at least 10 years to eliminate taxes on future appreciation. Holding periods of 30 years or more will not receive additional step-up beyond the fair market value as of year 30, which may influence exit strategies.
State and local tax treatment can vary
Not all states conform to the federal QOZ tax benefits. Depending on the jurisdiction, investors may still owe state or local taxes on the deferred or exempt gain. Investors should understand how their state applies QOZ rules before investing.
