**Opportunity Zones (OZ)** are economically-distressed communities (8,764 census tracts designated nationwide) where new investments may be eligible for preferential tax treatment under IRC Section 1400Z-2 (created by 2017 Tax Cuts and Jobs Act). **3 major tax benefits**: **1.

Capital gains deferral**: Defer paying capital gains tax on gains invested in Qualified Opportunity Fund (QOF) until **December 31, 2026** (or earlier if you sell OZ investment). **Example**: Sell stock in 2024 with $500,000 gain.

Normally owe $119,000 in federal taxes (20% LTCG + 3.8% NIIT).

Invest $500,000 in QOF within 180 days → **defer tax payment until 2026** (2+ years of tax-free compounding). **2.

Partial basis step-up** (if invested before 2020): Hold QOF investment for **5 years** → 10% of deferred gain excluded from tax.

Hold for **7 years** → 15% excluded. **Example**: $500,000 gain deferred.

After 7 years, only pay tax on $425,000 (saved $17,850 in taxes). **Note**: Must invest by 12/31/2019 to get 7-year benefit (by 2026 deadline).

Most new investors cannot use this anymore. **3.

Permanent exclusion of OZ appreciation** (main benefit for new investors): Hold QOF investment for **10+ years** → **0% tax** on any appreciation in the OZ investment itself. **Example**: Invest $500,000 deferred gain in QOF real estate fund.

Property grows to $1 million over 10 years.

Sell in year 11: Pay tax on original $500,000 deferred gain (in 2026 or when sold), but **$500,000 appreciation is tax-free** (saved $119,000 in taxes on growth). **Total tax deferral + appreciation exclusion = powerful wealth-building tool**.

**180-day reinvestment requirement**: You have **180 days** from the date of sale generating capital gain to invest proceeds into a Qualified Opportunity Fund (QOF) to qualify for OZ tax benefits. **Clock starts**: **For individuals**: Day of sale of asset (stock, real estate, business, cryptocurrency, etc.). **Example**: Sell rental property on March 15, 2024 with $300,000 gain.

Must invest $300,000 (or any portion) into QOF by **September 11, 2024** (180 days later). **For pass-through entities** (partnerships, S-corps): 180-day period starts on **last day of entity's tax year** (not sale date). **Longer window for partners**. **Example**: Partnership sells asset with $1M gain on June 1, 2024.

Partnership tax year ends December 31, 2024.

Individual partners have until **June 29, 2025** (180 days from 12/31/2024) to invest their share of gain in QOF. **Partial investment allowed**: Don't have to invest entire gain. **Example**: $500,000 gain from stock sale.

Invest only $200,000 in QOF within 180 days → **defer tax on $200,000**, pay tax on remaining $300,000 in current year. **Important deadline notes**: **180 days is calendar days, not business days** (includes weekends/holidays).

File **Form 8949** with your tax return to report gain and deferral election. **Extension not allowed** - 180 days is hard deadline (IRS rarely grants relief). **Capital gain must be recognized in 2024 or later** (no retroactive deferral).

Gain can be short-term or long-term capital gain (both eligible). **QOF investment must be equity** (stock or partnership interest in QOF entity, not loans/debt).

**December 31, 2026 deadline** = Date when all deferred capital gains become taxable (regardless of whether you still hold OZ investment). **Tax planning timeline for new investors (2024-2025)**: **Scenario 1 - Invest in 2024**: **Capital gain**: $500,000 invested in QOF by June 2024. **Deferral period**: 2.5 years until 12/31/2026 deadline. **Tax due**: April 15, 2027 (when filing 2026 tax return), pay tax on original $500,000 gain. **OZ investment**: Continue to hold for full 10 years (until 2034) to get permanent exclusion of appreciation. **Tax savings**: $0 on deferral (too late for 5/7-year step-up), but **100% tax-free growth** on OZ appreciation over 10 years. **Example**: QOF grows from $500k to $1.2M by 2034.

Pay tax on $500k deferred gain in 2027 ($119k tax), but **$700k appreciation is tax-free** (saved $167k in taxes). **Net benefit: $48,000** from deferral (2.5 years of tax-free compounding at 7% = ~$65k growth, minus time value of money ~$17k). **Scenario 2 - Invest in 2025**: **Deferral period**: Only 1-1.5 years until 2026 deadline. **Minimal deferral benefit**, but still get 10-year appreciation exclusion. **Is OZ still worth it after 2026 deadline?** **Yes, if**: 1) Expect strong appreciation in OZ investment (10%+ annual returns). 2) Plan to hold for full 10+ years. 3) Have large capital gains and want to reduce tax on future growth. **No, if**: 1) Short holding period planned (under 10 years). 2) Opportunity cost of locking up capital in OZ fund. 3) Can invest in higher-return non-OZ opportunities. **Alternative strategies**: **1031 Exchange** for real estate (no 10-year requirement, but must be like-kind property). **Installment sale** to spread gain over multiple years (but no appreciation exclusion). **Charitable Remainder Trust** to defer gain and get charitable deduction.

**Qualified Opportunity Fund (QOF)** = Investment vehicle (corporation or partnership) that holds **at least 90% of assets** in Qualified Opportunity Zone Property (QOZP) - real estate or businesses located in designated Opportunity Zones. **QOF structure options**: **1.

Direct real estate QOF**: Fund buys land/buildings in OZ, develops or improves them. **Typical hold**: 10+ years (to maximize tax benefits). **Example**: Multifamily apartment development, retail center, hotel. **2.

Qualified Opportunity Zone Business (QOZB)**: Operating company in OZ (manufacturing, technology, services). **50%+ of revenue** must come from OZ operations. **Tangible property**: 70%+ of assets must be in OZ. **3.

Fund of funds QOF**: Invest in multiple OZ projects (diversification). **Example**: Portfolio of 10-15 real estate projects across different cities. **How to invest in QOF**: **Public QOF funds** (open to all investors): Available through financial advisors, brokerage platforms. **Examples**: Some real estate investment trusts (REITs), interval funds. **Minimum investment**: $25,000-$100,000 typical. **Fees**: 1-2% annual management fee + 10-20% carried interest. **Private QOF funds** (accredited investors only): **Minimum**: $50,000-$500,000+. **Hold period**: Typically locked up 10+ years (illiquid). **Target returns**: 12-18% IRR (higher risk/reward). **Self-directed QOF** (high-net-worth): Create your own QOF entity (LLC or partnership).

File **Form 8996** to self-certify as QOF.

Invest directly in OZ real estate or business. **Full control** but requires expertise in real estate/business operations. **Due diligence before investing**: **Track record**: Fund manager's experience in OZ development/operations. **Underwriting**: Review financial projections, exit strategy, comparable sales. **90% asset test**: Ensure fund will maintain 90% QOZP at all times (or face penalties). **Substantial improvement test**: For existing buildings, must invest equal to basis within 30 months. **Exit liquidity**: How will fund return capital after 10+ years?.

**Qualifying capital gains** (eligible for OZ deferral): **Short-term capital gains** (assets held <1 year): Yes, eligible. **Example**: Sell stocks after 6 months with $100,000 gain (taxed at ordinary income rate 37%) → Invest in QOF, defer tax until 2026, get appreciation exclusion. **Long-term capital gains** (assets held 1+ years): Yes, eligible. **Example**: Sell rental property after 5 years with $500,000 gain (taxed at 20% LTCG + 3.8% NIIT) → Defer via QOF. **Collectibles gains** (28% rate): Yes, eligible. **Example**: Sell art, gold coins, classic cars with gain. **Section 1231 gains** (business property): Yes, eligible (real estate, equipment depreciated under Section 1231). **Section 1250 depreciation recapture** (25% rate): Yes, eligible (unrecaptured Section 1250 gain from rental real estate). **K-1 gains from partnerships/S-corps**: Yes, eligible (partners/shareholders can invest their distributive share). **Cryptocurrency gains**: Yes, eligible (Bitcoin, Ethereum, etc. - IRS treats as property subject to capital gains). **Non-qualifying gains** (cannot defer in OZ): **1.

Section 1245 recapture** (ordinary income from equipment depreciation) - Not a capital gain. **2.

Capital gain from sale of OZ investment itself** - Cannot "roll" one OZ investment into another. **3.

Dividends** - Ordinary income, not capital gain. **4.

Interest income** - Not capital gain. **5.

Royalties/rents** - Not capital gain (ordinary income). **6.

Ordinary business income** - Not capital gain. **7.

Related party sales** - Gain from selling to family member, controlled entity (not eligible). **Partial reinvestment**: Only the portion invested in QOF within 180 days gets deferral. **Example**: $1M capital gain.

Invest $600,000 in QOF → Defer tax on $600,000, pay tax on $400,000 in current year.

**Top 7 Opportunity Zone investment risks**: **1. 10-year illiquidity**: Must hold for 10+ years to get full tax benefit (appreciation exclusion). **Risk**: Capital locked up, cannot access for emergencies, opportunities. **Example**: Invest $500,000 in OZ fund in 2024.

Cannot sell without losing tax benefit until 2034.

Opportunity cost if market crashes or better investment appears. **2.

Limited track record**: OZ program created in 2017 (relatively new). **Risk**: Many fund managers have no experience operating in distressed communities. **Example**: Fund promises 15% IRR but defaults to 5% (lower than S&P 500). **3. 90% asset test penalty**: QOF must hold 90%+ of assets in QOZP at all times (tested every 6 months). **Risk**: If fail test (drop below 90%), fund pays penalty = **∫Monthly underage × Federal short-term rate**. **Example**: Fund holds 85% QOZP for 6 months (5% underage) → Pay penalty on investors' deferred gains. **4.

Substantial improvement test for buildings**: If buying existing building in OZ, must **double the basis** within 30 months. **Risk**: Renovation costs exceed projections, fail to meet deadline. **Example**: Buy $1M building, required to invest additional $1M in improvements.

Construction delays → Fail test → Lose OZ benefits. **5.

Valuation risk on exit**: **Risk**: After 10 years, OZ real estate may not appreciate as expected (or depreciate). **Example**: Invest $500k in OZ property, expect to grow to $1.5M.

Actual value in 2034: $600k (only $100k appreciation, not $1M).

Tax-free gain benefit reduced by 90%. **6.

Economic distress of OZ location**: By definition, OZ are low-income, high-unemployment areas. **Risk**: Slower growth, higher crime, tenant/customer challenges. **Example**: Retail project in OZ struggles to attract tenants due to location. **7.

Tax law change risk**: Future Congress could modify or eliminate OZ benefits. **Risk**: Permanent exclusion eliminated, forced to pay tax on appreciation. **Mitigation**: Invest only if project makes sense on standalone basis (without tax benefits).