Opportunity Zones Tax Benefits

In an effort to spur economic development a program called Opportunity Zones were created under the 2017 Tax Cuts and Jobs Act. The goal is to attract long-term investments by giving tax incentives to those will re-invest their unrealized capital gains in a Qualified Opportunity Fund (QOF). 


A QOF is essentially an LLC that is dedicated towards investments in Opportunity Zone assets – real estate, businesses or business assets; and there are over 900 zones across California!




Executive Summary: 

  • Instead of paying your capital gains tax you can re-invest those proceeds in a QOF and defer your payment of that tax until 2026.
  • The QOF needs to substantially improve the investment it acquires.
  • The gain on sale of the QOF investment can be completely tax free after 10-years. 


Key People this Opportunity is for: 

  • Those who have blown their 1031 exchange
  • Those selling appreciated stock and want to invest in real estate
  • Sellers of a business – they can re-invest their gain in another business or real estate, or certain publicly traded opportunity zone funds. 
  • Property owners in the opportunity zone looking for an investor to buy and improve the property.


For your investment to be qualified in the Opportunity Zone, it must be:

  1. Made via a Qualified Opportunity Fund. The fund must hold at least 90 percent of its assets in Opportunity Zones.
  2. Derived from a gain in another investment.The gain is transferred into an Opportunity Fund within 180 days of realizing the gain.

A business can be qualified as an Opportunity Zone business if: 

  1. Substantially all the tangible property owned or leased is used in an opportunity zone
  2. At least 50% of the gross income earned by the business is coming from the active conduct of business within an Opportunity Zone. 


Note: Not all rental real estate is an active trade or business.

In addition to the above criteria, certain businesses are excluded from the program. They can't be a “private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or other facility used for gambling, or any store the principal business of which is the sale of alcoholic beverages for consumption off premises.” 


Notably, residential development is not included as a prohibited business, so a qualifying business is not limited to commercial developments. 


Once the investors' capital gains are invested to QOFs, these investors will receive the following tax incentives: 

  1. Deferral of taxes on capital gains. Investors pay no tax until the end of 2026 or when the asset is disposed of, whichever is earlier.
  2. Step-up in basis.The basis is increased by 10 percent if the investment is held for at least 5 years and by an additional 5 percent if held for at least 7 years, thereby excluding up to 15 percent of the original deferred gain from taxation.
  3. Elimination of tax on new gains.Investors pay no taxes on any capital gains produced for investments held for at least 10 years.

Note: California has not conformed to the Federal change in the tax law. The capital gains tax savings will be equivalent to the federal capital gains tax you would have otherwise owed. 


Example of Potential Tax Benefits from Investing in Opportunity Zones


Bob and Jane sell the business that they started and ran for 30-years for $600,000. Their accountant determines that they will have a $500,000 capital gain, which at the federal rate (20%) means they must write a check to the IRS for $100,000. Instead of paying the IRS now, Bob and Jane put that $500,000 or some portion of it, into a Qualified Opportunity Fund (QOF).  That QOF buys a duplex in an Opportunity Zone and converts it into a 4-plex.  Bob and Jane will have to pay $85,000 in capital gains tax on their 2026 tax return for the underlying gain that they reinvested into the QOF. The big benefit is that if Bob and Jane hold their 4-plex for 10-years before selling it – they will pay no tax on the gain from the sale of their 4-plex.* 


*Assuming they also meet all the technicalities of the law – this is general advice for illustration purposes and not to be taken as legal advice for your specific situation. Consult your own attorney for your personal situation!


Write a comment

Comments: 6
  • #1

    Christina Kovacs (Thursday, 03 September 2020 14:19)

    Hi there,

    I am interested in setting up an opportunity zone fund for a property that I'm currently under contract with that is located in an opportunity zone. Here are details:

    I sold multiple properties in 2020, one of them closed on August 3rd. Our taxable cap gain on that property is approximately $123k.

    The property under contract currently is in an opportunity zone, purchase price is only $85k but we plan to put in $65k initially and an additional $20k over time and hold as annual rental.

    How much do you charge to set up the opportunity zone fund? I plan to set up a Florida LLP and get an EIN but I need help with everything else in order to make sure this is set up properly and I can use the tax benefits for 2020.

    Thank you and I'm looking forward to hearing from you.

  • #2

    Law Office of Jason G. Pink, a Professional Corporation (Friday, 04 September 2020 14:19)

    Dear Christina, Thanks for your message. You'll need to connect with a licensed Florida attorney to help you with your matter. Our office only practices in California.

  • #3

    l (Thursday, 15 April 2021 20:35)

    I have a question, let's say a California resident investor purchases QOF asset in 2020 within 180 days of realizing 2019 capital gains, and absent some exception would properly defer said 2019 federal capital gains. 
    1. If Investor sells the QOF asset in 2020, would this prevent him from deferring the 2019 federal capital gains until 2020?  Is here some minimum time frame he needs to hold the QOF asset for?

    2.  When investor sells the QOF asset, according to california tax law, what will his cost basis in the QOF be?

  • #4

    JPink Law, APC (Wednesday, 21 April 2021 13:20)

    Thanks for the inquiry. Those specific questions would best be addressed in a paid consultation or with your tax advisor. Please contact us to move forward on that issue - we look forward to working with you.

  • #5

    DILIP PATEL (Thursday, 02 September 2021 20:13)

    This is Dilip I Patel, Enrolled Agent, practicing individual and business taxes at 1154 E Yorba Linda Blvd, Placentia, CA 92870.
    Here is the scenario where we need your help.
    Three of my clients have huge capital gain and wish to defer their gain by investing in Opportunity Zone. Now the invest firms start paying back the amount from the third year and almost pay the total invested amount and rest of the amount in remaining years with huge due amount at the end of the investment period or equal installments in ten years.
    We would like to know the federal and state of CA tax impact on the amount receiving before the end of the investment period of ten years that is taxable or not?
    Is this the area of your expertise where you can help us? If yes please let us know the professional fees for the written opinion and the one time consultation with a group meeting with my clients.

  • #6

    andrew wolff (Tuesday, 21 June 2022 19:28)

    hello, i need assistance purchasing a commercial condo in an opportunity zone. this is an office commercial condo where my business will be located so as i understand it i need to set up an opportunity zone fund, and then file a tax form with the irs designating the purchase as an opportunity zone purchase? if it does not appreciate, there is virtually no tax benefit to me doing this if I am not buying the property with capital gains funds, correct?

    Anyway, i have questions about how to do this transaction.

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