Topic 01 · 6 min read
Opportunity Zones
A government map that can erase tax on future growth.
Certain lower-income neighborhoods are designated Opportunity Zones. Take a gain from selling anything — stock, a business, a building — put it into a Qualified Opportunity Fund that invests there, and the tax on that gain is postponed. Hold long enough and the growth inside the fund can come out tax free.
What to know
- The 180-day window
- You generally have 180 days from the sale that created the gain to move the money into a qualified fund.
- Only the gain travels
- Unlike a 1031 exchange, you reinvest the profit, not the whole sale price. The rest of the money is yours to keep.
- Deferral first
- Tax on the original gain is pushed to a later year set by the rules rather than paid at the time of the sale.
- Ten years is the prize
- Hold the fund investment ten years or more and the appreciation earned inside the fund can be excluded from tax entirely.
- Substantial improvement
- Buying an existing building is not enough. The fund normally has to roughly double its investment in the structure within 30 months.
The tax benefit
Today's gain is deferred, and a decade of future growth inside the fund can escape capital gains tax altogether.
Worked example
Stock gain into a zone
An investor sells stock at a $300,000 gain and rolls it into a fund building apartments in a zone. The $300,000 is deferred, and if the apartments are worth far more in eleven years, that growth can come out untaxed.
Watch out for
- The neighborhood still has to make sense as an investment — tax breaks do not rescue a bad deal.
- Funds have real compliance requirements and testing dates; sloppy administration can disqualify them.
- Selling early loses the ten-year benefit entirely.
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