A Qualified Opportunity Zone (QOZ) is an economically distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment. Localities qualify as QOZs if they have been nominated for that designation by a state, the District of Columbia, or a U.S. territory and that nomination has been certified by the Secretary of the U.S. Treasury via their delegation of authority to the Internal Revenue Service (IRS).

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 Qualified Opportunity Zone (QOF) properties.

Eligible capital gains can be invested into a Qualified Opportunity Fund (QOF). By investing in a QOF, the invested capital gains tax is not due until 2026.

Generally, you have 180 days to invest an eligible gain into a QOF. The first day of the 180-day period is the date the gain would be recognized for federal income tax purposes if you did not elect to defer the recognition of the gain.

Depending upon the Qualified Opportunity Fund (QOF), you may need to be an Accredited Investor in order to participate. That means having earned income of at least $200,000 in each of the past two years ($300,000 with a spouse) and net worth, alone or with a spouse, of at least $1 million in investable assets.

1. Eligible capital gains can be invested into a Qualified Opportunity Fund (QOF). By investing in a QOF, the invested capital gains tax is not due until 2026.
2. After holding an investment in the QOF for at least ten years, an investor’s disposition of an investment in the QOF does not result in any additional federal income taxes.

Gains that may be deferred are called “eligible gains”. They include both capital gains and qualified 1231 gains, but only gains that would be recognized for federal income tax purposes before January 1, 2027, and that are not from a transaction with a related person. For you to obtain this deferral, the amount of the eligible gain must be timely invested into a Qualified Opportunity Fund (QOF) in exchange for an equity interest in the QOF (qualifying investment). Once you have done this, you can claim the deferral on your federal income tax return for the taxable year in which the gain would be recognized if you do not defer it.

Examples of eligible gains include the sale of stock, real estate, a business, cryptocurrency, art, and partnership interests.

Yes. Although an individual who invests in a Qualified Opportunity Fund (QOF) without eligible gains will not enjoy the tax benefits of the Opportunity Zone program.

Yes.  A Qualified Opportunity Fund (QOF) can be structured to invest in a single property or multiple properties within Opportunity Zones.

The significant difference between the two options is that the 1031 exchange is a deferral program with unlimited duration, while the QOZ program has a limited deferral period, but affords tax-free profits after a minimum 10-year hold. The determination of which program is better will vary based on each individual investor’s objective. If an investor’s primary goal is to defer taxes indefinitely and never access the investment capital, the 1031 exchange would be the preferable solution; however, if an investor wishes to realize the profits on an investment at some point in their lifetime, a QOZ fund is the better option.

Because the taxes deferred in a 1031 exchange can roll on indefinitely, the 1031 exchange option can be a valuable estate planning tool. If an investor is willing to hold onto investment property for life, the taxable gains disappear; the investor’s heirs receive a step-up in basis to the property’s fair market value on the date of death, erasing any previous appreciation in the value. Those heirs can then sell the asset immediately without a capital gain. Under the QOZ program, there’s no escaping the tax man on December 31, 2026, and any person who inherits an interest in a QOZ Fund prior to that date will assume the original tax basis in the investment (no step-up upon death) and be obligated to pay the tax; however, if the heir holds the QOF Fund interest until a date that is at least 10 years from the original investment, their tax basis will receive a step-up to the investment’s fair market value upon disposition.