Qualified Opportunity Zones

QOZs Explained

Opportunity Zones were created as part of the Tax Cuts and Jobs Act of 2017 with the intent of increasing investments into housing and other real estate in underdeveloped communities across the United States.

Qualified Opportunity Zones (QOZs) provide the opportunity to reinvest capital gains with the potential for short- and long-term tax advantages while encouraging economic development and job creation.

Tax Beneﬁt Potential Through Qualiﬁed Opportunity Funds

A Qualified Opportunity Fund (QOF) is an investment vehicle that files either a partnership or corporate federal income tax return and is organized for the purpose of investing in QOZ property. QOFs are required to hold at least 90 percent of its assets in QOZ property and must meet additional standards.

There are no limitations on the amount of investable capital and investors may be eligible for favorable tax treatment in the form of both deferral and forgiveness. Defer taxable income from gain until 12/31/2026. A 10+ year hold on QOF (qualified opportunity fund) allows for complete tax elimination

EXPLORE THE QOZ RESOURCE CENTER

Trade or Business

A Qualified Opportunity Fund (QOF) is an investment vehicle organized as a corporation or partnership that is created for the purpose of investing in QOZ property. A QOF holds at least 90% of its assets in QOZ businesses and assets. Criteria to be considered QOF business property include tangible property used in a trade or business, must be acquired by purchase after 12/31/2017, original use in the QOZ must commence with the investment or the QOF must “substantially improve” the property, and all use of the property must be noticeably in the QOZ.

Substantially all of the property owned or leased is QOZ business property

At least 50% of the total gross income of such entity is derived from the active conduct of business

Substantial portion of the intangible property is used in the active conduct of business

Less than 5% of the average of the aggregate unadjusted basis of the property of such entity is attributable to nonqualified financial property

Some properties do not qualify for the program - “no sin” businesses such as a suntan facility, race track, massage parlor, liquor store or hot tub facility

Acceptable Gains from Sale or Exchange

Taxable gain from the sale or exchange of virtually any type of property may potentially defer gains by reinvesting proceeds in a QOF within 180 days of the sale or exchange.

Gain is eligible for deferral if it is from the sale or exchange of property with an unrelated party (not more than 20 percent common ownership) and the gain is treated as a capital gain (short-term and long term) for federal income tax purposes.

Understanding Eligibility

The first day of the 180-day period to reinvest gains into a QOF generally is the date on which the gain would be recognized for federal income tax purposes. Regulations provide that taxpayers eligible to elect gain deferral include:

Individuals

C Corporations (Including regulated investment companies (RICs) and real estate investment trusts (REITs)

Partnerships

Certain other pass-through entities

Investment Timeline

2024

Sale of Original Investment ($1M gains realized)

2024

Investor realizes gain on original investment and invests gain into QOF

2026

Deferred Taxes Due 12/31/2026

2026

Investor pays deferred tax on original gain

2034

10-Year Exemption on $1M QOF Investment

2034

Investor will not owe taxes on gains in the QOF investment

Opportunity Zone Program End *

* QOF investment ends per terms outlined in the specific fund.

After-Tax Hypothetical Scenario^{1, 2, 4}

$1,000,000 investment over a 10-year hold
Assuming hypothetical 8% compounded rate of return on both investments
Investors may pay $0 in capital gains on next decade of returns

25100 INL General Design Non and Qualified Opportunity Fund@2x (1)

Illustration assumes investor is subject to top marginal U.S. federal income tax rate of 20% on long-term capital gains for individuals, net investment income tax of 3.8%and state tax of 6.2% for a total tax liability of 30%. This illustration assumes that no brokerage or investment advisory fees are accounted for with respect to Non-Qualified Opportunity Fund example and assumes that no fees are due to the asset manager and its affiliates and no sales commissions, deal fees or placement agent fees are accounted for with respect to Qualified Opportunity Fund example. This communication is not intended as tax advice, and investors should consult with their own tax advisors regarding an investment in a Qualified Opportunity Fund.
Illustration assumes that Qualified Opportunity Zone investor is a resident of a state that conforms with QOZ program.
Assumes that investor has no capital losses to reduce such capital gain and refers to inclusion of the original, invested capital gains in such investor’s taxable income on December 31, 2026.
Example assumes investor does not pass away during 10-year period. If investor were to pass away, heirs receive a step-up in basis in Non-Qualified Opportunity Fund example and a carryover basis for Qualified Opportunity Fund example.

Inland’s QOZ Resource Center