An Opportunity Zone is a geographical area nominated by the state and certified by the Treasury Department as qualifying for the tax incentives detailed in the 2017 Tax Cuts and Jobs Act.

The Opportunity Zone program allows for the sale of any appreciated assets, such as real estate or stocks, with a reinvestment of the gain into a Qualified Opportunity Fund. Unlike a 1031 Exchange, there is no requirement to invest in a like-kind property to defer the gain. 

To defer a capital gain (including net §1231 gains), a taxpayer has 180 days from the date of the sale of the appreciated asset, to invest the realized capital gain dollars into a Qualified Opportunity Fund. The fund then invests in Qualified Opportunity Zone property.

The taxpayer may invest the return of principal as well as the recognized capital gain, but only the portion of the investment attributable to the capital gain will be eligible for the exemption from tax on further appreciation of the Opportunity Zone investment, as explained below.

A Qualified Opportunity Fund investment provides potential tax savings in multiple ways:

Tax deferral through 2026 - A taxpayer may elect to defer the tax on some or all of a capital gain if, during the 180-day period beginning at the date of sale/exchange, they invest in a Qualified Opportunity Fund. Any taxable gain invested in a Qualified Opportunity Fund is not recognized until December 31, 2026 (due with the filing of the 2026 return in 2027), or until the interest in the fund is sold or exchanged, whichever occurs first.

No tax on appreciation - Perhaps the most significant tax benefit of the program, remaining in the Qualified Opportunity Fund for at least 10 years results in the cost basis of the property being equal to the fair market value on the date of sale/exchange.

A non-partisan group of legislators introduced H.R. 5761, which is currently pending approval. The bill would bolster Opportunity Zone benefits in multiple ways, including:

• Extension of the deferral period until the 2028 tax year (payable in 2029).

• Up to a 10% step up in basis on invested capital gains payable following the deferral period.