Markets and asset prices have been strong for several years, resulting in significant capital gains for many investors. In the stock market, the real estate market, and private equity, valuations are high. How can capital be invested compellingly?

It may be possible to find the answer through Opportunity Zones (OZs), created by the Tax Cut and Jobs Act of 2017. Investments in economic areas that have not recovered from the Great Recession are encouraged by OZs.


Deferral of capital gains recognition until December 31, 2026, will benefit investors who realize capital gains in Opportunity Zones. Consider this a loan with no interest.

Qualified Opportunity Zone (QOZ) funds also have no capital gains tax upon sale if held for ten years. Investments in real estate are not subject to depreciation recapture.

Capital gains taxes increase the net after-tax return of opportunity zone funds by 3% to 5% compared to investments with exact expectations. The cumulative return difference could be as high as 34% to 62%. During the ten years, there are benefits to investing in development and value-added real estate through the QOZ fund.

As projects are built and stabilized, QOZ funds will realize most of their value during the year’s first half. It is now possible to refinance capital returns, and no capital gain is triggered when an investment does not exceed the investment limit.

How It Works

Investing in a qualified opportunity fund before December 31, 2026, you can defer tax on eligible gains until you have an inclusion event.

There are two types of eligible gains: capital gains and 1231 gains, but only if the payments are in the following categories:

  • Before January 1, 2027, recognized for federal income tax purposes
  • Transaction not involving a related party

Gains from selling business property typically qualify as 1231 gains on Form 4797.

Qualified Opportunity Funds accept investments other than cash. It is, however, possible that only part of an opportunity zone investment (that is, a qualifying investment) will qualify for tax benefits. If you transfer property with a higher value than your contributed property, you can defer only the amount of gain on the transferred property.

Filing Requirements

Investors holding qualifying investments in a Qualified Opportunity Fund must meet annual investor reporting requirements for the tax year.

Timing of Investments

Within 180 days of realizing a gain, you must invest in a Qualified Opportunity Fund in exchange for equity interest (not debt interest). Federal income tax recognition follows the 180 days if the gain has not been deferred.

Tax Benefit

Qualified Opportunity Fund investments have tax benefits based on the time you hold them. Investing in a Qualified Opportunity Fund with a deferred gain reduces the basis of the investment. Long-term investors’ motivation will increase as they have their QOF investments.

Deferral of taxes for a temporary period

  • Investing in a Qualified Opportunity Fund for at least five years will increase your basis (the amount you invest) by 10%.
  • Your basis will be increased by 5% if you hold your investment in a Qualified Opportunity Fund for seven years or more.

After ten years, the basis changes.

  • A qualifying investment may be permanently excluded from gain when sold or exchanged if you hold it for at least ten years.
  • Qualified Opportunity Fund investments do not qualify if their fair market value increases on the date of sale or exchange.

Eligible Gain Deferral: How to Elect

The eligible gain must go into a Qualified Opportunity Fund as part of the qualifying investment. In the taxable year where the revenue would otherwise be recognized, you can elect to defer it by using Form 8949, Sales and Other Dispositions of Capital Assets.


Qualified Opportunity Fund investments are taxable upon sale or exchange. As a result, you should file Form 8949, Capital Asset Sales. Knowing your basis is essential to determining whether or not a gain or loss has occurred on a property sale or disposition. In addition to the five to seven-year basis adjustments, if applicable, and any other allowable increases or decreases, your basis in the Qualified Opportunity Fund investment is zero.

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