What are the advantages to investing in Opportunity Zones?

High-net-worth investors are constantly seeking strategies that help them build wealth while improving their tax situation. A strategy that can do both is investing in Opportunity Zones.

By making investments in Opportunity Zones you can defer, reduce, and even eliminate capital gains taxes by supporting development in economically underserved communities.

If you're sitting on significant gains from stock sales, business dispositions, or real estate transactions, Opportunity Zones allow you to reinvest them in a tax-advantaged way.

What Are Opportunity Zones?

Opportunity Zones are designated areas in low-income communities where new investments can be eligible for preferential tax treatment.

This program was created as part of the Tax Cuts and Jobs Act of 2017 to promote economic development and job creation in distressed communities by providing tax incentives to investors.

There are nearly 8,700 Opportunity Zones in the U.S. They were nominated by state governors and certified by the U.S. Treasury Department.

To take advantage of the tax benefits, you invest your capital gains into Qualified Opportunity Funds (QOFs). QOFs were made specifically for investments in Opportunity Zones.

Where are Opportunity Zones in California?

California has 879 Opportunity Zones due to its economy, population growth, and ongoing urban development initiatives. California’s Opportunity Zones are attractive for residential and commercial investments. Areas include:

• Los Angeles County: Over 230 zones mostly in downtown and South LA areas

• San Francisco Bay Area: Zones in Oakland, San Jose, and parts of San Francisco which are near major tech hubs

• Sacramento Region: As the capital of CA, zones here benefit from the state government’s presence

• San Diego County: Coastal and inland zones with population growth and development potential

Where are Opportunity Zones in Idaho?

Idaho has had rapid development in recent years due to its growing population. They currently have 28 designated Opportunity Zones.

• Boise Metro Area: Several zones in Boise and surrounding communities, capitalizing on Idaho's tech sector and population influx.

• Twin Falls: Agricultural and commercial development opportunities in south-central Idaho

• Coeur d'Alene: Northern Idaho zones benefiting from tourism and residential growth

• Pocatello: Zones targeting revitalization of this southeastern Idaho city

Idaho's zones offer investors lower entry costs compared to California, while still providing access to markets with growth potential.

How to Invest in Opportunity Zones

What are the requirements for Qualified Opportunity Funds?

The investment vehicle for Opportunity Zones are QOFs. These funds must:

• Hold at least 90% of their assets in Qualified Opportunity Zone Property

• Be organized as corporations or partnerships for federal tax purposes

• File Form 8996 annually with the IRS

As an investor, you can choose between two types of investments:

• Direct Investment: Create your own QOF for large, direct investments

• Fund Investment: Invest in professionally managed QOFs that pool capital from multiple investors

How can I make sure my Opportunity Zone investment has preferential tax treatment?

You must follow specific timing requirements to maximize your tax benefits:

• 180-Day Rule: Capital gains must be invested in a QOF within 180 days of the gain realization

• Holding Periods: Different levels of tax reductions are available based on how long you hold the investment (explained in “What are the Tax Benefits of Opportunity Zone Investing” section)

What types of investments can I make with QOFs?

• Real Estate Development: New construction or substantial rehabilitation of existing buildings

• Operating Businesses: Businesses that conduct most of their operations in Opportunity Zones

• Mixed-Use Projects: Combinations of residential, retail, and office space

What are the advantages to investing in Opportunity Zones?

1. Tax Benefits

   The potential tax benefits are the deferral, reduction, and elimination of capital gains taxes on your new investments. These are explained in more detail in the next section.

2. Portfolio Diversification

   Opportunity Zone investments are often in real estate and businesses, offering diversification beyond traditional stocks and bonds.

3. Impact Investing

   You can align your financial and charitable goals by creating jobs and helping improve infrastructure in underserved communities.

4. Potential for Strong Returns

   Opportunity Zones are in high growth and development areas, offering potential appreciation.

5. Flexibility in Investment Types

   Unlike 1031 exchanges that require like-kind property, Opportunity Zones allow you to invest gains from any source into real estate or business opportunities.

6. No Income Limits

   Unlike many tax strategies, there are no income limits for Opportunity Zone investing. This means even the ultra-high-net-worth can benefit from them.

7. Estate Planning Benefits

   Because the step-up in basis at death applies to Opportunity Zone investments, you could potentially remove all capital gains taxes for heirs.

What are the Tax Benefits of Opportunity Zone Investing?

1. Temporary Deferral

   When you invest capital gains into a QOF, you can defer paying taxes on those gains until 12/31/2026 or when you sell your Opportunity Zone investment, whichever comes first.

2. Reduction of Deferred Gains

   • 5-Year Hold: Your deferred capital gains are reduced by 10%

   • 7-Year Hold: Your deferred capital gains are reduced by 15%

3.  Elimination of Future Gains

   If you hold your QOF investment for 10 years, you pay zero capital gains taxes on any appreciation of your Opportunity Zone investment. You also get your 15% reduction on your deferred capital gains taxes from your 7-year holding.

Tax Calculation Example

• Original capital gains: $1,000,000

• Investment in QOF: $1,000,000

• Value after 10 years: $2,000,000

• Taxes on deferred gains (15% reduction): $850,000 × 20% = $170,000

• Taxes on Opportunity Zone appreciation: $0

• Total tax savings compared to immediate recognition: $230,000

Disadvantages of Opportunity Zone Investing

1. Liquidity

   To eliminate your capital gains taxes you must commit capital for 10 years, meaning these investments are highly illiquid.

2. Limited Investment Space

   Investments are restricted to designated zones, which limits options in comparison to the broader market.

3. Complexity

   Opportunity Zones rules are complex and changing (especially with the One Big Beautiful Bill), requiring ongoing compliance.

4. Investment Risk

   Opportunity Zone projects have market risk, development risk, and potential loss of principal.

5. Forced Recognition in 2026

   All deferred capital gains must be recognized by December 31, 2026, regardless of the investment's performance or your financial situation at that time.

Who Should Consider Opportunity Zone Investing?

1. High-Net-Worth Individuals with Significant Capital Gains

   Opportunity Zones can give you tax relief if you're facing substantial capital gains taxes from stock sales, real estate transactions, etc.

2. Long-Term Investors

   If you’re comfortable with a 10-year investment horizon to reap the full tax benefits, Opportunity Zones might be worth considering.

For investors with significant capital gains, Opportunity Zone investments can help you defer, reduce, or eliminate your capital gains taxes.

However, due to their complex regulations, the long-term commitment required, and the investment risks, careful planning and monitoring are important.

As always, we recommend working with a tax professional who understands both tax strategies and wealth management.

Author: Rob Cucchiaro, CFP, CRPC, AAMS

Questions answered in this blog:

• What are Opportunity Zones?

• How many Opportunity Zones are there in the U.S.?

• What are Qualified Opportunity Funds?

• What are the requirements for Qualified Opportunity Funds?

• Where are Opportunity Zones in California?

• What benefits are there to Opportunity Zones in LA?

• What benefits are there to Opportunity Zones in San Diego?

• What benefits are there to Opportunity Zones in the Bay Area?

• What benefits are there to Opportunity Zones in Sacramento?

• Where are Opportunity Zones in Idaho?

• What benefits are there to Opportunity Zones in Boise?

• What benefits are there to Opportunity Zones in Coeur D’Alene?

• What benefits are there to Opportunity Zones in Twin Falls?

• What benefits are there to Opportunity Zones in Pocatello?

• How can I make sure my Opportunity Zone investment has preferential tax treatment?

• What types of investments can I make with QOFs?

• What are the tax benefits of Opportunity Zone investments?

• What are the tax benefits if I hold my Opportunity Zone investment for 5 years?

• What are the tax benefits if I hold my Opportunity Zone investment for 7 years?

• What are the tax benefits if I hold my Opportunity Zone investment for 10 years?

• What are the advantages to investing in Opportunity Zones?

• What are the disadvantages of investing in Opportunity Zones?

• Who should consider Opportunity Zone investing?