The Opportunity Zones incentive was created by the Tax Cuts and Jobs Act of 2017 to encourage long-term investments in low-income urban and rural communities nationwide. The initiative operates to encourage economic growth by providing tax benefits to investors thus giving them incentive to re-invest their unrealized capital gains into dedicated qualified opportunity funds (QOF). First, investors can defer tax on any prior gains invested in a QOF until the earlier of the date on which the investment in a QOF is sold or exchanged, or Dec. 31, 2026. A QOF is an investment vehicle set up as a corporation or a partnership for the purposes of investing in an eligible property located in an Opportunity Zone. If the QOF investment is held for longer than five years, there is a 10% exclusion of the deferred gain. If the investment is held for more than seven years, there is a 15% exclusion. Furthermore, if the investor retains the investment in the Opportunity Fund for at least 10 years, the investor is eligible for an increase in the basis of the QOF investment equal to its fair market value on the date that the QOF is sold or exchanged. Significantly, one does not have to reside, work or own a business in the Opportunity Zone to qualify for this tax advantage. To qualify, one must only invest in a recognized gain in a QOF and elect to defer on that gain.
Opportunity zones include a wide array of real estate sectors, including multifamily and affordable housing, industrial developments and mixed-use developments, which include hospitality and retail. Eligible investments are restricted to new developments and capital-intensive renovations, including property repurposing or rehabilitations, ground-up developments, business headquarter expansions and public/private partnerships.
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