Investors looking to grow their wealth don’t give Opportunity Zone investments nearly the attention they should, but they are one of the most potent tax-saving tools available today. The Opportunity Zone program, created under the 2017 Tax Cuts and Jobs Act (TCJA), is designed to encourage business development in economically distressed areas while providing preferential tax treatment.
The challenge is that few investors or financial advisors understand the nuances of investing in Opportunity Zones, including leveraging the tax benefits to build long-term wealth.
ARQ Wealth is positioned to help you understand the mechanics of investing in Opportunity Zones and provide expert guidance on using their tax benefits to grow your wealth. Call us at (480) 214-9572 or use our contact form to learn more.
Here’s a brief guide to investing in Opportunity Zones and how to maximize your tax savings.
What Are Opportunity Zones?
The Opportunity Zone program was created to encourage economic development in localities that most need it. Opportunity Zones are designated economically distressed areas where you can earn special tax incentives for deploying your capital. Each state can determine which areas qualify as zones, but the U.S. Department of Treasury must certify the designation. Since the 2017 TCJA was enacted, state governors have designated more than 8,700 districts as Opportunity Zones.
How Do Opportunity Zone Investments Work?
You can’t invest directly in qualified Opportunity Zones. Instead, you invest in a Qualified Opportunity Fund (QOF), specialized investment vehicles that pool capital to invest in businesses or institutional-quality real estate within an economically distressed community.
To capitalize on the tax advantages, you must rollover capital gains generated from the sale of an appreciated asset (i.e., stocks, real estate, business interests, etc.) into a QOF within 180 days of the sale. Though some of the tax benefits will expire at the end of 2026, there are still two compelling incentives to invest right now:
Capital Gains Tax Deferral
An immediate benefit of investing in a Qualified Opportunity Fund is the ability to defer capital gains taxes. When you reinvest your capital gains into the fund, you can defer taxes on those gains until December 31, 2026, or when you sell your fund, whichever comes first. Your investment grows tax-free in the interim.
Tax-Free Growth on New Gains
The most significant remaining incentive for investing in a Qualified Opportunity Fund is the potential for tax-free appreciation. If you hold the fund for at least ten years, you will pay zero capital gains tax on any appreciation when you sell. That could result in a sizable increase in return on your investment over time.
Reduction of Capital Gains Tax Liability
One significant tax benefit has already expired, which is No Step Up in Basis. That benefit reduced your deferred gain by up to 15% if you held your fund for at least seven years.
Although this benefit is no longer available for new investments, the deferral period remains a significant benefit for new investors.
Non-Tax Reasons for Investing in a Qualified Opportunity Fund
As with any investment, a Qualified Opportunity Fund should be able to stand on its own merit without considering tax advantages. Successful investors know that tax advantages cannot turn a bad investment into a good one, but they could turn a good investment into a great one.
Here are some of the more compelling non-tax reasons to invest in QOFs:
High Return Potential with Tax Efficiency
Investing in a Qualified Opportunity Fund provides a rare combination of high growth potential and significant tax savings. With traditional assets such as real estate or stocks, capital gains taxes eat into your returns. With a QOF, you can reinvest those gains more effectively.
Portfolio Diversification
Investing in a Qualified Opportunity Fund exposes you to real estate developments, infrastructure projects, and startups in emerging markets. This diversification can help mitigate risk while improving your long-term investment performance.
Community Impact and Social Good
Beyond financial gains, investing in a Qualified Opportunity Fund allows you to support economic development in disadvantaged areas. This can be appealing if you want to prioritize positive social change as an investment objective.
What Happens When the Program Expires?
The 2017 TCJA is scheduled to expire at the end of 2026, limiting the time to take advantage of all the tax incentives offered by Qualified Opportunity Funds. While you will no longer be able to invest in them, if you invest before expiration, you can still benefit from the tax benefits as long you hold the fund for the required period.
Dates to Consider
December 31, 2026: When the capital gains deferral benefit expires on December 31, 2026, you will be expected to account for the original deferred gains when you file your taxes in April 2027. However, if you hold your Qualified Opportunity Fund for ten years or more, you can still avail yourself of the favorable tax treatment of gains, even if they’re realized after 2026.
December 31, 2047: The entire program is scheduled to fully sunset on December 31, 2047. However, the 2026 expiration could be extended, or new legislation could be introduced to continue the program beyond 2047 in some form.
A new bipartisan bill, the Opportunity Zones Transparency, Extension, and Improvement Act of 2023 (HR 5761), has been introduced. It would extend the program for an additional two years (through December 2028) if passed. The proposed extension is expected to receive strong bipartisan support, just as the original bill did. Until that happens, it is prudent to proceed as if the current expiration date of December 31, 2026, will hold.
Potential Risks and Considerations
Qualified Opportunity Fund involves certain risks, including the potential lack of return, loss of principal, and unexpected tax consequences. A fund’s performance will depend on the tenant’s ability to pay rent. Properties may be purchased using leverage and liquidated at the fund manager’s discretion. The fund could have difficulty selling them because there is no public market for the type of assets held in the fund.
While the tax benefits of investing in Qualified Opportunity Funds are attractive, it’s essential to consider the following factors before investing:
Investment Risk: As with any investment, there is potential loss. Many Opportunity Zones are in underdeveloped areas, and not all projects will be successful.
Long-Term Commitment: You must hold your investment for at least ten years to fully reap the tax benefits.
Regulatory Complexity: Navigating the rules and regulations surrounding Opportunity Zone investments requires careful planning and compliance.
This is where working with an experienced financial team like ARQ Wealth can make all the difference. We help you evaluate funds, identify the best opportunities, and structure investments to maximize tax advantages while minimizing risk.
Take Advantage of Opportunity Zone Investments Today
Opportunity Zone investments offer a powerful tax-saving strategy if you’re looking to grow your wealth while supporting economic development. With benefits like deferred capital gains taxes, tax-free appreciation, and portfolio diversification, these investments can be excellent financial decisions—especially when guided by experienced professionals.
Navigating the world of Opportunity Zone investments requires expertise in tax planning, investment strategy, and compliance with IRS regulations. At ARQ Wealth, we specialize in helping clients maximize their returns while keeping more of their money through strategic tax planning.
If you want to learn how to keep more of your money while making strategic investments, reach out to ARQ Wealth today. Our team of financial experts is ready to help you explore the best Opportunity Zone investments available for your portfolio.
Call ARQ Wealth at (480) 214-9572 now to maximize your investment potential while minimizing your tax burden!
