Ken Roberts: Opportunity Zone tax rules

Ken Roberts
Market Beat
Ken Roberts

Opportunity Zones were created as a part of the Tax Cuts and Jobs act on Dec. 22, 2017.

There are zones in all 50 states that were selected by the state governors and submitted to the US Treasury department. The purpose of creating Opportunity Zones is to stimulate investment in low income tracts.

Several funds have been created to allow investors to buy into the zones without having to own the actual real estate. They are known as Qualified Opportunity Funds. The rules still aren’t quite finalized on how the Qualified Opportunity Funds will work, but they should be published soon. The Internal Revenue Service has submitted final regulations to the White House for review.

Basically, they way they will work is that you can invest a realized long-term capital gain into an Opportunity Zone real estate investment or a Qualified Opportunity Fund and defer paying taxes on that gain. You may defer the gain for a five-year period and get a 10% reduction in the tax liability or defer the gain for a seven year period and obtain a 15% reduction on the long term capital gains tax.

Additionally, if you hold the real estate investment for 10 years it can be sold after that time with no capital gains tax at all.

There are some issues that needed clarification when the Opportunity Zones were first created. One is how will Section 1231 gains be treated.

Section 1231 allows for real estate capital gains to be re-invested with a capital gains tax advantage. Another one is how to pair the zones with existing real estate tax credits such as, New Markets, Low Income Housing, Renewable Energy and Historic. The definition of vacant property needs to be clarified. The tax treatment of debt financed distributions has to be defined. Another area is how improvements to the property will be treated. Substantial improvements are supposed to be made and there will be tests to determine if adequate improvements have been completed.

Hopefully, the final rules will be out by late this year or early next year. Definitely consult with a qualified tax advisor if you’re considering using an Opportunity Zone investment for tax deferred gains.

Funds are available now, but as yet, there aren’t any publicly traded funds.

We should start seeing some publicly traded Qualified Opportunity Zone funds next year once the final rules are determined.

Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.

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