What Gains Qualify for Opportunity Zones?

Comments · 252 Views

The Tax Cuts and Jobs Act were passed by Congress in 2017, which then created the Qualifies Opportunity Zone program. With this program, investors can reduce their capital gains tax liability or eliminate it from the future value appreciation.

The opportunity zones investment has tax incentives that allow the investors to double their after-tax returns. This is a much more lucrative investment than traditional real estate investment opportunities. The tax incentive of opportunity zone investment is meant to improve economic development and create more jobs in distressed communities. With investment in the opportunity zones come some investment gains. Find out the gains that qualify for opportunity zones.

Eligible Gain

These include qualified 1231 gains and capital gains. To qualify, the gains must be recognized for federal income tax purposes before 1st January 2027. Also, they should not be from a transaction with another person. To obtain this gain, your amount of eligible gains must be invested in the Qualified Opportunity Fund traded for an equity interest in qualifying investment. After this, you can easily claim your eligible gain on the federal income tax return of the taxable year.

Qualified Opportunity Fund

This investment tool helps you file a partnership or a corporate federal income tax return. It is recognized for use in investing in Qualified Opportunity Zone’s property. To qualify for the QOF, your partnership or corporation must self-certify filling out form 8996 annually with the federal income tax return. Form 8996 must be filed timely, considering all the extensions.

Step Up in Basis

The tax basis of your qualifying investment will increase to its fair market value from the date you exchange or sell it. This is only possible if you hold the qualifying investment for more than 10 years. You get the stepped-up basis. To put this into perspective, your qualified investment in the real estate Opportunity Zones increases tax-free. There won’t be any payable capital gains tax on the increased value when you decide to exchange or sell it. However, note that if you decide to sell your qualified investment before the 10 years end, you can roll it over into other qualifying investment.


If you can manage to hold your qualifying investment in Opportunity Zones for more than five years, you are allowed to exclude 10% of the deferred gain from federal capital gains tax. In simpler terms, only 90% of your original gain is taxable. If you can hold your investment for more than 7 Years, your exclusion will be 15% of the deferred gain from capital gain tax. Only 85% of your gain will be taxable if this is the case.

Qualified Opportunity Zone Property

This is the Qualifying Opportunity Fund’s ownership interest in the partner4ship operating the qualified Opportunity Zone business. To get a qualified ownership interest, there are three things you must do. First, the partnership must be a Qualified Opportunity Zone business. Second, you must acquire the interest after 31st December 2017 in exchange for cash, and finally, for the 90% of holding time of the interest, the partnership was under Qualifying Opportunity Zone business. These instructions are available in Form 8996.

All government investment programs must-have details to be worked out. But the clearest thing with Opportunity Zones is that it offers the real estate investors an opportunity to be different and permanently get rid of or defer the existing capital gains. This they can do while still investing in the underdeveloped communities across the USA.