What is an Opportunity Zone?

Definition

An opportunity zone is a region in the United States that has been nominated specifically by a state, Washington D.C., or a U.S. territory. The U.S. Secretary of the Treasury certifies the nomination, giving authority to the Internal Revenue Service to manage the tax laws.

How do opportunity zones work?

Individuals and businesses that invest capital gains from the sale of another investment into projects in qualified opportunity zones receive specific tax benefits. Opportunity zones aim to promote economic growth and create jobs through projects such as affordable housing, student housing, workforce housing, investments in renewable energy, multifamily residential, and the development of small businesses in these designated areas.

How to invest in opportunity zones?

To benefit from the tax incentives associated with capital gains invested in an opportunity zone, you must invest through a qualified opportunity fund (QOF). A qualified opportunity fund must be an entity, partnership, or limited liability company treated as a partnership or corporation under local laws. It must be organized for the purpose of investing in an opportunity zone and hold at least 90% of its assets in opportunity zone property.

How does taxation work on opportunity zone investments?

The objective of investing in an opportunity zone (in addition to contributing to the development of economically distressed areas) is to defer capital gains taxes on your investment. For this purpose, capital gains include both short-term and long-term capital gains, as well as qualified capital gains from the sale of business property. To receive this favorable tax treatment, you must meet certain requirements.

Summary of key points

Investing in an opportunity zone allows investors to avoid paying taxes on temporary capital gains on the sale of other investments and potentially exclude some of those gains from taxes permanently. These investments aim to promote job creation and support development in economically distressed areas across the United States. Investments in qualified opportunity zones must be made through qualified opportunity funds. Investors must file initial and annual applications with the U.S. Internal Revenue Service to obtain applicable capital gain deferrals.

Source: https://www.thebalancemoney.com/what-is-an-opportunity-zone-5118414

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