The Opportunity Zones program, established via the Tax Cuts and Jobs Act, aims to spur long-term private sector investments in low-income communities nationwide.

Investors in Qualified Opportunity Funds participating within designated Qualified Opportunity Zones can take advantage of federal tax benefits in exchange for their contributions to economic growth and investment in distressed communities. Project sponsors can also benefit from lower-cost capital generated by the program. 

How it works

The Opportunity Zones program offers federal tax incentives for investing realized capital gains in QOFs, which are investment vehicles created to attract investment into under-invested communities. All or a portion of the realized gain must be invested in a QOF within 180 days.[1]

Virtually any entity or individual required to report capital gains can receive Opportunity Zone benefits. The investment offers three potential tax benefits:

  1. deferral of the tax on the original gain until the earlier (a) the date of the taxpayer sells or exchanges its investment in the QOF, or (b) December 31, 2026.
  2. reduction of the tax on the original gain: (a) 10 percent discount if the QOF investment is held for five years by Dec. 31, 2026 or the date of disposition, if earlier; (b) an additional 5 percent discount (15 percent total) if held for seven years by December 31, 2026.
  3. No taxable gains on the QOF investment if held for 10 or more years.

[1] Investors receiving gains on a K-1 from an investment may be able to elect December 31 of the tax year as the date of the gain (regardless of the date of the actual capital gain event), and therefore have until June 29 of the following tax year to make an investment into a QOF. Please consult with your tax advisor for eligibility to make this election.

Investment Example

*This model assumes a 23.80% federal tax rate, 5.00% growth rate and 10.00% annual investment return. This model is for illustration purposes only, and contains certain financial assumptions as to the possible future results that are inherently uncertain and subjective. We make no representation or warranty as to the attainability of those assumptions or whether future results will occur as illustrated.

How to establish a certified Qualified Opportunity Fund

Eligible taxpayers may self-certify to become a Qualified Opportunity Fund by attaching to its tax return Form 8996. No approval or action by the IRS is required.

Where are the Opportunity Zones?

Use our interactive map to search the complete list of Opportunity Zones that have been nominated, certified and designated.

What’s next?

There are a number of open issues surrounding the Opportunity Zones that require guidance from the U.S. Treasury Department or Internal Revenue Service. The first round of guidance arrived in late October and more is anticipated by year-end. We expect the additional guidance to focus on open questions related to operational issues, such as the availability of the 31-month runway for the deployment of funds in a direct investment model and the ability for residential rental property with a triple net lease to qualify as an active trade or business for the purpose of qualification as qualified Opportunity Zone business property. We will provide regular updates as the program continues to take shape and investment criteria and timing is outlined.

How we can help

By leveraging our expertise in real estate development, transactions and specialty tax planning, Baker Tilly is uniquely positioned to help potential investors and project sponsors take advantage of the Opportunity Zones program.

Investor services

  • Tax planning
  • Selective investment offerings that have undergone extensive due diligence by Baker Tilly Capital

Project sponsor services

  • Financial modeling showing the after-tax impact of OZ benefits and recommending strategies to optimize the capital stack
  • Cost segregation studies to accelerate depreciation recovery
  • Construction audit services to ensure adherence to construction contract terms
  • Fund administration
  • Identify and source other credits and incentives
  • Potentially raise capital through Baker Tilly Capital (subject to diligence and an approval process)

Baker Tilly has extensive knowledge of comprehensive capital structures, including tax credits and incentives, traditional lending programs and nontraditional capital sources. If you are looking to invest gains in or leverage the Opportunity Zones program for a business or project benefitting low-income communities, connect with us today.

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