What is a Qualified Opportunity Fund?

Opportunity Zone legislation within the Tax Cuts and Jobs Act of 2017 is a powerful tax strategy that uses tax incentives to attract long-term private investments and promote economic growth in designated urban and rural areas.

Through an investment vehicle called a Qualified Opportunity Fund, an investor potentially has the ability to:

  • Defer an existing capital gain upon the sale of appreciated assets; and
  • Avoid a capital gain on any profits resulting from the Qualified Opportunity Fund investments.

Investor Benefits

Generally, investors who experience a capital gain from a sale or exchange of a capital asset and elect to invest such capital gain into a Qualified Opportunity Fund within 180 days after the sale or exchange may be eligible for certain benefits:

  • 1
    Ability to unlock original basis and separate it from their capital gain.
  • 2
    Ability to defer capital gain tax liability until December 31, 2026.
  • 3
    Ability to reduce capital gain tax liability by a total of 10%
    through a step-up in tax basis upon remaining invested in the Qualified Opportunity Fund for at least five years.
  • 4
    Ability to reduce capital gain tax liability by a total of 15%
    through an additional step-up in tax basis upon remaining invested in the Qualified Opportunity Fund for at least seven years.
  • 5
    Ability to eliminate capital gain tax liability on the additional capital gain realized
    through the investment in the Qualified Opportunity Fund upon remaining invested in the Qualified Opportunity Fund for at least ten years.
  • 6
    Ability to support community development and make a social impact through private investment.
  • 2019
    Capital gain event occurs. Reinvest your capital gain in a Qualified Opportunity Fund.
  • Deferred payment of original capital gain tax.
  • 2027
    Tax payment is due (for 2026 tax year). Receive up to a 15% step-up in tax basis.
  • 2028
    Pay no capital gain tax on investment in Qualified Opportunity Fund.

Community Benefits

Transforming and uplifting neighborhoods by injecting private capital into designated communities to help spur economic development and improve quality of life.

Who Qualifies

Anyone who recognizes a capital gain for Federal income tax purposes may qualify for the tax benefits. The capital gain can be from nearly any asset (business, real estate, stocks, bonds, etc.). This includes individuals, C corporations (including regular investment companies), Real Estate Investment Trusts (REITS), partnerships, S Corporations, trusts and estates. To defer the gain realized from the sale of an appreciated asset, the investor must reinvest the gain into a Qualified Opportunity Fund within 180 days of realizing the gain. Investors can invest the original basis from the appreciated asset sale as well into the Qualified Opportunity Fund, but only the portion of the investment attributable to the gain from the appreciated asset will be eligible for the exemption from tax on future potential appreciation in the Qualified Opportunity Fund.

Frequently Asked Questions

Created under the Tax Cuts and Jobs Act of 2017, Opportunity Zones are population census tracts that meet the definition of “low-income communities” under the U.S. tax code and have been designated as an Opportunity Zone. The U.S. Treasury Department has certified nearly 9,000 census tracts as Opportunity Zones, including tracts in every state, Washington D.C., Puerto Rico, and the U.S. Virgin Islands.

A Qualified Opportunity Fund is an investment vehicle (corporation or partnership) that holds at least 90% of its assets in: (i) Qualified Opportunity Zone Business Property (includes real estate); (ii) Qualified Opportunity Zone Stock; and/or (iii) Qualified Opportunity Zone Partnership Interests.

The following provides a brief summary of each qualifying asset type:

Qualified Opportunity Zone Business Property (includes real estate):
  • 1. Tangible property used in a trade or business of the Qualified Opportunity Fund;
  • 2. Acquired by the Qualified Opportunity Fund for cash or property in a taxable transaction from an unrelated party;
  • 3. Either original use of the property commenced by the Qualified Opportunity Fund or the Qualified Opportunity Fund substantially improves the property by doubling its basis (less land value) within a 30-month period. This can include new development or redevelopment of existing buildings located within a Qualified Opportunity Zone; and
  • 4. Does not include an interest in another Qualified Opportunity Fund.
Qualified Opportunity Zone Stock:
  • 1. Stock of a domestic corporation acquired by the Qualified Opportunity Fund for cash in an original issuance;
  • 2. The corporation must be a Qualified Opportunity Zone Business at the time of the acquisition and remain so for substantially all of the Qualified Opportunity Fund’s holding period for the stock; and
  • 3. The Qualified Opportunity Zone Business must have substantially all of the tangible property of the business as Qualified Opportunity Zone Business Property with at least 50% of the entity’s gross income derived from the active conduct of the business within the Qualified Opportunity Zone. Certain businesses are excluded including: golf courses, liquor stores, massage parlors, country clubs, tanning salons, and gambling establishments.
Qualified Opportunity Zone Partnership Interest:
  • 1. Equity in a domestic partnership acquired by the Qualified Opportunity Fund for cash in an original issuance; and
  • 2. Partnership must be a Qualified Opportunity Zone Business at time of acquisition and remain so for substantially all of the Qualified Opportunity Fund’s holding period of the partnership interest.

Investors can sell any investment and keep the original basis in that investment. It is important to note that the gain can come from any capital asset sale and is not restricted to only real estate investments.

To defer the capital gain realized from the disposition of an appreciated asset, the investor must reinvest the gain into a Qualified Opportunity Fund within 180 days of realizing the gain. The returned principal portion of the investment (original basis) can also be reinvested; however, only the appreciation gain portion of the original investment is eligible for the tax benefits.

Any investor that recognizes an eligible capital gain for U.S. federal income tax purposes may take advantage of the tax benefits of investing in a Qualified Opportunity Fund, including individuals, corporations (including real estate investment trusts (REITS) and regulated investment companies), and partnerships. All capital gain on the sale or exchange of any asset to an unrelated party recognized prior to 2027 and invested within 180 days are eligible for the full tax benefits. An gain includes both short-term and long-term capital gain, as well as a Section 1231 gain treated as capital gain (generally, a gain from the sale of depreciated property in excess of prior depreciation deductions).

Certain capital gains are not eligible for deferral, including:

  • 1. A capital gain is recognized on a sale of property to a related party (generally 20% common ownership or certain family partnerships); and
  • 2. The sold property is subject to offsetting positions that significantly diminish the investor’s risk of loss.

If an investor holds its Qualified Opportunity Fund interest for five years prior to the end of the deferment period (earlier of sale of interest or December 31, 2026), the investor will not be subject to U.S. federal income tax on 10% of the deferred capital gain.

If an investor holds its Qualified Opportunity Fund interest for a total of seven years prior to the end of the deferment period (earlier of sale of interest December 31, 2026), the investor will not be subject to U.S. federal income tax on an additional 5% (for a total exclusion of 15%) of the deferred capital gain.

If the investor holds its Qualified Opportunity Fund interest for at least 10 years, the investor generally will not be subject to U.S. federal income tax on any additional gain recognized by the investor (in excess of the deferred gain recognized in 2026) on the disposition of its Qualified Opportunity Fund interest, provided the disposition occurs prior to 2048.

Investors that invest a capital gain into a Qualified Opportunity Fund within 180 days of recognizing the gain will defer taxes on the capital gain until the earlier of December 31, 2026 or upon disposition of their interest in the Qualified Opportunity Fund. Investors will have to recognize a portion of the deferred gain that year, but investors may benefit from the step-up in basis (5 Years- 10% and 7 Years- 15%) if they reach either holding period before December 31, 2026.

If the investor holds its Qualified Opportunity Fund interest for at least 10 years, the investor generally will not be subject to U.S. federal income tax on any additional gain recognized by the investor (in excess of the deferred gain recognized in 2026) on the disposition of its Qualified Opportunity Fund interest, provided the disposition occurs prior to 2048.

By investing in a Qualified Opportunity Fund, investors can potentially receive multiple benefits including:

  1. 1. Obtaining the opportunity to unlock their original basis and reinvest their capital gain into a tax efficient investment program
  2. 2. Deferring capital gain tax upon the sale of appreciated assets until payment is due in 2027 (for 2026 tax year)
  3. 3. Receiving up to a 15% step-up in tax basis when taxes are owed in 2027 as part of the 2026 tax year
  4. 4. Generally not recognizing a capital gain on any profits from the fund investments after a minimum 10-year investment period
  5. 5. Supporting community development and making a social impact through their investment

Investors generally must invest in a Qualified Opportunity Fund within 180 days of recognizing the eligible capital gain. Investors make the deferral election on IRS Form 8949, Sales and Other Dispositions of Capital Assets, which is to be attached to the investor's tax return for the year in which the deferred gain would have been recognized.

  • 1. The recognition of capital gain must occur before making the Qualified Opportunity Fund investment. An investment in a Qualified Opportunity Fund without prior recognition of a capital gain eligible to be deferred will not qualify for any of the special Qualified Opportunity Fund tax benefits, including the exclusion of gain on future appreciation.
  • 2. An “investment” in a Qualified Opportunity Fund generally means the acquisition of an equity interest in a Qualified Opportunity Fund for cash or property. A loan to a Qualified Opportunity Fund or a contractual commitment to contribute capital in the future will not qualify as an investment.
  • 3. The cash invested in a Qualified Opportunity Fund by an investor does not have to be “traceable” to any proceeds giving rise to the deferred gain. For example, an investor that recognizes a “phantom” capital gain through a partnership may defer the gain by contributing the investor’s own funds (including funds obtained through borrowing) equal to the amount of the gain to a Qualified Opportunity Fund within 180 days.
  • 4. All or any portion of a capital gain may be deferred through an investment in a Qualified Opportunity Fund. An item of capital gain may also support investments in multiple Qualified Opportunity Funds or multiple investments in a single Qualified Opportunity Fund (up to the total amount of gain) as long as the investments are made within 180 days of recognizing the eligible capital gain.

A partnership that recognizes an eligible capital gain may defer recognition of the gain for U.S. federal income tax purposes by investing such gain in a Qualified Opportunity Fund within 180 days of recognition. If a partnership does not elect to defer the gain by investing in a Qualified Opportunity Fund, the partners in the partnership may make their own deferral elections with respect to their allocable shares of the capital gain by investing in a Qualified Opportunity Fund outside the partnership. Under this scenario, the partner may treat its allocable share of the capital gain as recognized under one of the following timing rules.

  • 1. The partner may treat the capital gain as recognized on the last day of the partnership’s taxable year in which the capital gain is recognized. Thus, if a calendar year partnership recognizes a capital gain on January 1, 2018, and does not elect to defer the gain by investing in a Qualified Opportunity Fund, each partner would have until June 30, 2019 (180 days after year end 2018) to elect to defer its distributive share of the capital gain by investing in a Qualified Opportunity Fund.
  • 2. A partner may elect to treat the capital gain as recognized on the date the partnership recognizes the gain, which could facilitate an earlier investment in a Qualified Opportunity Fund.
There is no restriction on the amount that may be invested into a Qualified Opportunity Fund; however, only the capital gain portion of the investment will receive the tax benefits. The additional invested funds will be accounted for as a separate investment in the Qualified Opportunity Fund and will be subject to U.S. federal tax policies.
Yes, if an investor sells all of its interest in a Qualified Opportunity Fund before 10 years, the gain will not be excluded from income as a general matter; however, the investor may elect to defer the gain from the sale of the Qualified Opportunity Fund interest by re-investing the gain in another Qualified Opportunity Fund within 180 days of the sale of the first Qualified Opportunity Fund. The investor’s interest in the new Qualified Opportunity Fund should also be eligible for the gain exclusion on future appreciation if the new Qualified Opportunity Fund interest is held for 10 years and disposed of prior to 2048.
While much of the talk regarding opportunity zones revolves around the tax benefits, its main purpose is to transform and uplift neighborhoods by injecting private capital to spur economic development and improve quality of life.

Operating income generated by the fund (e.g., rental income from real estate) generally will be taxed according to ordinary U.S. tax rules based on the Qualified Opportunity Fund structure. For instance, if the Qualified Opportunity Fund is structured as a partnership, rental income from underlying investments will be reported to investors on their Schedule K-1s and included in their taxable income.

Qualified Opportunity Fund investors are generally required to take a zero basis in their fund interest for which the deferral election is in effect. An investor’s basis generally will be increased by the amount of gain recognized at the end of the deferral period in 2026, in addition to any other basis increase under ordinary U.S. tax rules.

The zero basis could reduce the ability of an investor in a Qualified Opportunity Fund structed as a partnership to utilize net losses generated by the Qualified Opportunity Fund during the deferral period because an investor in a partnership generally may not deduct losses in excess of its basis in the partnership interest. The zero basis could also increase the likelihood that an investor may recognize gain from Qualified Opportunity Fund distributions in excess of its basis, including return of capital distributions from a Qualified Opportunity Fund organized as a corporation or REIT.

Investing in a Qualified Opportunity Fund is speculative and involves a high degree of risk, which each investor must carefully consider. An investment in a Qualified Opportunity Fund will be highly illiquid, and investors must be prepared to bear the risks of investment for the full term of the Qualified Opportunity Fund. Real estate, along with other assets that a Qualified Opportunity Fund may invest in, are subject to the risks typically associated with real estate and business investments, including, but not limited to, natural disasters, acts of war or terrorism, environmental issues, changes in governmental laws and regulations, and adverse changes in national and local economic and property conditions. Accordingly, there can be no assurance or guarantee that an investment objective will be achieved, and an investor could lose all or a substantial amount of his, her or its investment. In addition, various acts, omissions, factors or circumstances could cause a Qualified Opportunity Fund to lose its qualification status with the Internal Revenue Service. Investors should consult with their attorneys, tax counsel, financial advisors and other professionals regarding the applicability of investments in a Qualified Opportunity Fund to their current situation.