Opportunity Zones

Thoughtware Article Published: Sep 19, 2019
Tax Advisor 2019

Many businesses and investors are looking at Opportunity Zones (OZ) to provide additional capital for deals. The OZ investment provides an incentive for investors with capital gains to reinvest in a business operating within certain zones. The OZs are located throughout the country in designated census tracts of land. New IRS guidance provides comfort to investors, businesses and deal-makers on how to properly structure these OZ investments.

Steps to Make an OZ Investment

There are several key steps to follow when making an OZ investment:

  1. The investor must have a capital gain (or net Section 1231 gain)
  2.  A fund must be set up – Either a corporation or partnership for tax purposes
  3. The investor sets up its own OZ Fund or invests in a qualified OZ Fund
  4. The investment generally is for cash in exchange for new equity in the OZ Fund
  5. The OZ Fund operates a qualified business or invests in a qualified OZ operating business
  6. The tax on the investor’s gain is deferred, and other tax benefits (examined below) may apply

The OZ Fund must self-certify as an OZ Fund and meet the IRS requirements going forward to remain in compliance. There must be a capital gain, and the OZ benefit is limited to the amount of the capital gain (or net §1231 gain) invested. The investor must invest using an OZ Fund and can’t directly invest without an OZ Fund.

Capital Gains

The IRS regulations indicate only capital gain is eligible for deferral using an OZ Fund. Capital gains include the sale of stocks, bonds, self-created intangibles, certain businesses and business assets. Gains from the sale of certain business assets generally qualify as §1231 gain. Examples include the sale of land or buildings held in a trade or business. Ordinary gains or recapture gain from the sale of business assets don’t qualify.

The gain must come from an actual, or deemed, sale or exchange with an unrelated person. The IRS emphasizes the gain must be realized and included in the computation of capital gain by the taxpayer. The OZ investment is limited to the capital gain. You can have the sale of two stocks—one at a loss and one at a gain. You may reinvest the sale of stock at a gain and not net the two sales. With §1231 gains, the IRS requires the gains to be netted at the individual level.

Eligible Investors

Many different types of taxpayers can invest in OZ Funds. Individuals, trusts, corporations, partnerships, S corporations, estates and other domestic taxpayers are all qualified investors as long as they meet the other requirements. The taxpayer must be a domestic entity. Foreign owners aren’t eligible for the OZ benefits. Pass-through entities such as partnerships and S corps can elect to defer gains at the entity level, or the entity may pass the gains through to give the partners or shareholders an option to reinvest directly.

Reinvestment Period

The capital gain must be reinvested in an OZ Fund within 180 days from the sale (or deemed sale) date. The 180-day period starts on the date the gain is recognized for federal income tax purposes. Partners and S corp shareholders have an option to invest within 180 days from the sale date at the entity level or December 31 (for calendar-year taxpayers).

Once the OZ Fund receives the capital, there’s a period of 31 months to start or invest in a business. The business must be started or the assets must be placed in service by the end of the 31-month period. The same rule applies to real estate businesses. Additional time is available due to government delays or timing issues. The OZ Fund must have a detailed written plan on how the capital will be deployed.

Tax Benefits of OZ Investments

There are three main tax benefits to investing in an OZ Fund:

  1. Deferral of capital gains originally deferred until the earlier of 1) a sale of the OZ investment or 2) December 31, 2026
  2. Step-up of investor basis. There is a 10 percent step-up for holding more than five years and an additional 5 percent for holding more than seven years, i.e., up to 15 percent permanent exclusion of the original deferred gain
  3. Permanent exclusion of tax on gains resulting from post-investment appreciation if held more than 10 years

The 15 percent step-up in basis applies to qualified investments on or before December 31, 2019. The 10 percent step-up in basis applies to qualified investments on or before December 31, 2021.


There are many potential tax benefits to investors and businesses for investing in OZs. Reach out to your BKD trusted advisor or use the Contact Us form below if you have questions.

For more information about OZs, view our OZ fact sheet or listen to our archived “Simply Tax” podcast episode.

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