Guide to Qualified Opportunity Zones (QOZ, OZ)

It’s a sad truth for investors: unless you’re buying and selling in a 401(k), IRA, or other tax-sheltered vehicle, capital gains taxes are a simple fact of life. They’re the bitter pill investors swallow when they sell a taxable investment at a gain, and the IRS comes calling for its cut in the form of a tax that can be up to 40.8% — 37% as a potential short-term capital gains tax, plus an additional 3.8% net investment income tax, depending on how long the investment was held and the tax bracket of the investor.

Not known for its generosity of spirit in the best of circumstances, the IRS is particularly stingy when it comes to capital gains taxes. The opportunity to defer the payment of such taxes is rare; the opportunity to eliminate them entirely, even more so.

Qualified Opportunity Zones

Enter the creation of Qualified Opportunity Zones, or QOZs.

Astute students of American politics will recognize the seeds of QOZs in the Empowerment Zones of the 1990s, and the Promise Zones created during the Obama administration, which called upon Congress to cut taxes on hiring and investment in these geographic areas targeted for economic development. But the idea was not fully realized until President Trump signed the Tax Cuts and Jobs Act into law on December 22, 2017. The TCJA was responsible for the creation of Qualified Opportunity Zones, areas designated in each of the fifty states, the District of Columbia, and five U.S. territories.

The Aim of QOZs

The aim of the law was twofold: to spur economic growth and job creation in parts of the country that can best benefit from growth and economic development while providing tax breaks to the investors who chose to invest in them. The communities were designated as Opportunity Zones by governors of the respective U.S. states and territories, with the subsequent approval of the Treasury Department. Currently, over 8,700 such OZs exist across the country, though investing in a QOZ does not require you to live or work in the area you choose for your investment. A complete map and listing of the Opportunity Zones can be found on the Department of Housing and Urban Development’s website.

QOZs from the Investor’s Standpoint

From the investor’s standpoint, the beauty of the QOZ opportunity lies in the fact that it enables an investment of money that would otherwise be subject to capital gains taxes. Importantly, the capital gain in question can come from the sale of appreciated real estate but is not limited to real estate gains. Whether your appreciated asset was real estate, stocks, bonds, cryptocurrency, an art or coin collection – any realized capital gain is eligible for investment in a QOZ.

Taking the amount of your capital gain and making a timely investment into a qualified OZ investment defers the payment of the tax until the subsequent sale of the investment or December 31, 2026, whichever comes first. But investors can also choose to hold the investment past the 2026 deferral deadline, and they’re well-incentivized to do so. Any investment held for a minimum of ten years will avoid any Federal capital gains tax on the QOZ investment itself, and may also eliminate state capital gains tax, depending on the state in question.

QOZ Options for your Investment Portfolio

The plethora of options available in any state or territory affords investors ample opportunity to diversify their real estate portfolios geographically. The sheer number of different kinds of QOZ investments available (existing or start-up businesses; apartment buildings or multi-family housing; commercial or residential real estate; medical buildings or hotels) offers tremendous diversification within sectors. There are limitations, of course. Golf courses, country clubs, liquor stores, casinos, or massage parlors, for example, cannot be included in a QOZ investment, but the available options far outweigh the exclusions.

As you can imagine, a significant tax break is accompanied by a myriad of rules, regulations, and requirements, and running afoul of any of these will reduce or eliminate the tax breaks in question. This guide will examine all the ins and outs of QOZ investing in great detail. Interested investors should also consider our QOZ Masterclass, which will teach you everything you need to know to take full advantage of what many experts call a “once in a generation” opportunity!

Click here to download the How To Invest In An Opportunity Zone Infographic, or see below.