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Opportunity Zone (OZ)

An Opportunity Zone (OZ) is a designated economically distressed community where private investments, under certain conditions, may be eligible for capital gain tax incentives. The Opportunity Zone program was established by Congress in the Tax Cuts and Jobs Act of 2017 with the intention of spurring long-term private investment in low-income communities. The goal is to foster economic growth and job creation in these distressed areas by providing tax benefits to investors.

Investors can reap these benefits by investing in a Qualified Opportunity Fund (QOF). A QOF is an investment vehicle that is set up as either a partnership or corporation for investing at least 90% of its assets in the eligible property (which can be business property, stock, or partnership interests) located in an Opportunity Zone.

Here’s a brief overview of the tax benefits associated with investing in a QOF:

  1. Temporary Tax Deferral: An investor can defer capital gains taxes from the sale of any appreciated asset, if those gains are invested in a QOF within 180 days of the sale or exchange. This deferral lasts until the investment in the QOF is sold or December 31, 2026, whichever comes first.
  2. Step-up in Basis: If the QOF investment is held for at least 5 years, there is a 10% step-up in basis. If held for at least 7 years, there’s an additional 5% step-up, totaling a 15% step-up in basis. This reduces the original deferred gain by 10% or 15% respectively.
  3. Permanent Exclusion from Tax on Gains: If the investment in the QOF is held for at least 10 years, the investor will pay no capital gains taxes on any appreciation of the QOF investment itself when it’s sold.

The program encourages investors to direct their resources to these zones, creating the potential for both profit and positive social impact in areas that might otherwise be overlooked.