Step-Up Benefit Expires Soon — Start Your Opportunity Zone Investment Now

  • Opportunity Zones
  • 10/19/2021

Key insights

  • The Opportunity Zone (OZ) program provides federal incentives for long-term investments in low-income communities.
  • Benefits for investors in OZs include deferred taxes, step-ups in basis (expiring soon), and no taxes on appreciation of long-term investments.
  • Assess eligibility and timeout dates when identifying an OZ investment that’s right for you. 
  • Typical OZ opportunities are diversified Qualified Opportunity Zone Funds (QOFs) or single-asset direct QOF investments.

Need help identifying a Qualified Opportunity Zone investment?

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Opportunity Zones (OZ) were first proposed in the bipartisan Investing in Opportunity Act, originally introduced in Congress in 2016. They were designed with a specific premise: the tax code should encourage private investment in communities struggling to attract capital, create jobs, and lift residents out of poverty. 

The Opportunity Zone program was created and enacted by Congress in the Tax Cuts and Jobs Act of 2017. OZs provide federal incentives for certain types of long-term, productive investments in low-income urban and rural communities nationwide.

What are the benefits for OZ investors?

Investors who invest capital gains into a Qualified Opportunity Zone Fund (QOF) are eligible for certain benefits if they meet the holding period requirements. The benefits of OZ investments can be simplified as: defer, reduce, and pay zero.
  • Defer —Capital gains can be deferred until December 31, 2026, with the related tax payable in 2027.
  • Reduce — Investors who hold an OZ investment for five years can exclude 10% of the deferred gain (i.e., they only pay tax on 90% of the gain). To receive this benefit, an investment must be made on or before December 31, 2021.
  • Pay zero — Investors who hold their investments in OZs for at least 10 years face no taxes on any appreciation in value of the investments when sold.

Assessing eligibility and timeout dates

Two key components to assess when identifying an OZ investment are eligibility and timeout dates. Consult your tax professional on these items to confirm you will be making a Qualified Opportunity Zone investment. 

First assess eligibility by confirming that you will be investing a capital gain or qualifying Section 1231 gain. In terms of investment amounts, OZ investments provide flexibility that other tax-advantaged real estate investments don’t. OZ investors can invest all or a portion of their gain, it’s up to them. 

To enhance OZ investments and remain in compliance, keep track of the many relevant dates. Some dates apply to all OZ investors, such as when certain benefits expire. One benefit set to expire shortly is the 10% step-up in basis, which ends December 31, 2021. Second are dates around the timing of when an OZ investment must be made. The general rule is that you have 180 days from the sale date or capital gain, with special rules applicable to gains that flow through to an investor via a Schedule K-1. 

Depending on the type of sale and how the assets are owned, there are consequences to timing. Discuss timeout dates with a tax professional who can help you understand this complex component. 

Choosing your OZ investment opportunity wisely

Remember, OZ benefits are only available to investments of capital gains with a properly filed deferral election. While you can invest in an OZ project even if you aren’t deferring capital gains, the investment would be treated like any other investment (e.g., it would not be eligible for the gain exclusion if the investment is held for 10 years).
 To date, most OZ investment opportunities have been in the real estate asset class. Typically, OZ investment opportunities take the form of diversified QOF or single-asset direct QOF investments.
  • Diversified funds aggregate investor capital and deploy it across different assets, creating diversification and decreasing risk for the fund and its investors.
  • Single-asset direct QOF investments allow investors to invest directly into a pre-identified asset — and the investment gives the QOF and investors an ownership position in that single asset.

There are some opportunities available for OZ investors to invest in businesses and funds that invest in businesses, but those investment opportunities have been less common and haven’t seen as much activity as real estate. And while qualifying for the 10% basis step-up is an incentive to make an OZ investment by December 31, 2021, finding a long-term investment that fits within your overall investment strategy may be more important.

How we can help

CLA is a leader in the Opportunity Zone space and provides services across the OZ spectrum. On the front-end, our M&A advisory and investment banking practice helps clients sell their businesses, which more often than not creates large capital gain events.

Our wealth advisory practice has advised on more than $200 million of capital invested in OZ funds. Our capital markets group works specifically with our real estate clients to fund their single-asset OZ projects, and to date has raised over $350 million of OZ capital from institutional investors.

CLA also conducts OZ compliance and testing, structuring consultation, fund administration, and other fund services for sponsors of OZ projects.

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