Opportunity Zone Investments: A Tax Deferral Opportunity You May Have Overlooked

Kirsch CPA Group

Feb 17, 2021

Many investors are unaware of the potential to defer taxes by investing in a qualified opportunity zone (“QOZ”). Created by the Tax Cuts and Jobs Act of 2017 and intended to spur economic development in economically distressed areas, QOZs are authorized under U.S. Treasury Department and IRS regulations.

While the rules surrounding QOZ investments can be complicated, the potential benefits to the investor are significant. For business owners and other investors who found themselves selling investments during 2020 to take advantage of lower capital gain tax rates, reinvesting all or a portion of these gains in a QOZ enables you to defer paying tax on the gain until 2026. Even better, if the investor holds the QOZ investment for at least 10 years and it appreciates, the investor pays no tax on the appreciation.

There are risks to be considered, starting with the fact that this investment, like any other, may fail. Investment in a QOZ is not guaranteed. Investors are making an investment into an operating business or real estate located in an opportunity zone.

Long-Term Horizon Required for Maximum Benefit

In addition, achieving the full benefits of the QOZ requires a long-term investment horizon since the main benefits are a result of leaving the investment in the QOZ until at least 2026 and up to 10 years. However, if an investor is willing to make such an investment, the QOZ may be worth considering.

Another advantage of investing in a QOZ is that unlike traditional “like-kind exchanges” or “1031 exchanges” an investor does not have to structure the QOZ investment in advance of selling the original investment. An investor can reinvest some or all of the capital gains from a previously sold investment into the QOZ prior to filing and paying tax on that year’s tax return.

There are other considerations and rules that can factor into the decision, but under the right circumstances, a QOZ investment may be worth a look.