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Tax Savings from Investments in Qualified Opportunity Zones

September 4, 2018

Though not as well-known as some of the other provisions of the Tax Cut and Jobs Act of 2017 (P.L. 115-97), the Opportunity Zone program created by the Act provides a unique opportunity for tax advantaged long-term investments in communities that need it most.  The program is designed to tap into the $2.3 trillion of taxpayers' unrealized capital gains and spur long-term economic development in low-income communities by allowing taxpayers to defer taxation on gains that are re-invested into these communities and meet other program qualifications.  Investing in this Opportunity Zone program begins with understanding what constitutes a Qualified Opportunity Zone ("QOZ") and Qualified Opportunity Fund ("QOF") and the benefits available.  

Under the Opportunity Zone program, a taxpayer can defer tax on the gain from any sale of an asset to an unrelated party through end of 2026 if the gain is reinvested in a QOF within 180 days of the sale.  The taxpayer will not pay the federal income tax on the gain until the QOZ investment is sold or December 31, 2026, whichever is earlier.  As an additional benefit, if the investment in the QOZ is held for at least 5 years, the taxpayer receives a 10% basis reduction on the deferred gain and if the investment is held for at least 7 years, the total basis reduction on the deferred gain rises to 15%. 

Importantly, if the QOZ investment is held for at least 10 years, the taxpayer is entitled to eliminate the entirety of the potential tax on the appreciated value of the original deferred gain during the time of the QOZ investment.  Holding a QOZ investment for 10 years will require the taxpayer to recognize the original deferred gain as of December 31, 2026 (less the 15% basis adjustment) but will still eliminate potential tax liability on the appreciated value between the date of the QOZ investment and the time the QOZ investment is sold. 

The QOZs in each state are nominated by the state's governor and certified by the Treasury Department.  On June 14, 2018 the Treasury Department approved the 300 census tracts throughout Pennsylvania nominated by Governor Wolf and over 8,700 tracts have been designated and certified as QOZs throughout all fifty states, the District of Columbia and U.S. territories.  QOZs generally consist of low-income community census tracts but may also include regular census tracts if they are contiguous with and do not exceed 125% of a median family income of a low-income community tract, provided that only 5% of regular census tracts may qualify under this exemption

In order to qualify for the Opportunity Zone program benefits, the investment must be made through a QOF.  These are investment vehicles in the form of a corporation or partnership that hold at least 90% of its assets in equity investments in businesses, real estate and other business assets within the QOZ.  However, real estate investments must be "substantially improved" in order to qualify for the program benefits and it is expected that the forthcoming regulations will clarify the details of the level and timing of improved real estate investments in QOZs.  Taxpayers may create their own QOF entities or choose to invest in a larger organized fund from a financial institution that will manage the funds to seek out QOZ investment opportunities. 

A simplified investment example is as follows:

After purchasing an investment property in 2010 for $500,000, a taxpayer sells the property for $1,500,000 in 2018 with a resulting $1,000,000 gain.  Instead of paying $200,000 in long term capital gains tax for the 2018 tax year, the taxpayer invests the $1,000,000 gain into a QOF intending to exit the QOF investment in 2029.  For tax year 2026, the taxpayer will pay capital gains tax on the original $1,000,000 gain of only $170,000 rather than the $200,000 that was originally deferred in 2018.  Assuming the QOF investment is sold for $1,750,000 in 2029, the taxpayer will have no additional tax liability on the additional $750,000 realized appreciation on the $1,000,000 QOF investment.

As with many new tax programs, the IRS and the Treasury Department are expected to release additional regulations in the coming months, so potential investors should be sure to consult with the appropriate professionals to ensure that potential investments qualify as QOFs and meet other Opportunity Zone program requirements. 

To see a map and list of designed Qualified Opportunity Zones in your area, follow the following link: For more information please contact, Gary Zlotnick at or Scott Goldstein at

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