What Is the Holding Period for Opportunity Zone Investments?
Carl E. Sera, CMT
March 31, 2023
In economically distressed communities, Qualified Opportunity Zones offer the potential for preferential tax treatment through certain conditions. How do Opportunity Zones work, what are the qualifications, and how long is the holding period?
How Opportunity Zones Work
Opportunity Zones are often used as economic development tools, allowing clients to invest in distressed areas in the United States. OZs fall under the Tax Cuts and Jobs Act of 2017, where taxpayers can invest in low-income communities, five U.S. territories, and the District of Columbia.
An Opportunity Zone Fund will enable investors to defer eligible gains taxes from investments until their inclusion event or by December 31st, 2026. You can find Qualified Opportunity Zones certified by the U.S. Department of Treasury.
Qualifications for an Opportunity Zone
There are different criteria to meet when qualifying for an Opportunity Zone investment. Certifying a Qualified Opportunity Fund (QOF) requires investors to file a federal income tax return via LLC, partnership, or corporation. Furthermore, investors must hold at least 90 percent of the Qualified Opportunity Zone property assets and remain organized for investing in QOZs under each of the 50 states’ laws, U.S. possession, and the District of Columbia.
Investors must also follow filing requirements, as the entity must file Form 8996 with an established partnership or corporation’s federal tax return. Form 8996 certifies corporations or partnerships organized to invest in QOF properties. It also determines the penalty if the failure to meet the 90 percent investment fails, along with reporting if the QOF meets the 90 percent investment standards.
Timing of Qualification Zone Investments
Investors have 180 days to invest the eligible gains when financing the amount of a QOF-eligible gain in qualifying for a QOZ tax incentive. On the first day of the 180-period date, the gain would become recognized for income tax purposes if not elected for deferment.
The holding period of Opportunity Zones can reach 10 years. Holding it for five years will increase deferred gains by 10 percent, and a seven-year hold will increase by an additional five percent. When investors reach the 10-year mark, they can permanently exclude gains resulting from selling or exchanging, as long as investors elect to increase their QOF investment basis to its market value.
Sera Capital offers specialized exit-planning services to individuals selling highly appreciated businesses, real estate, and concentrated stock positions. We assist individuals as fiduciaries, not being held to institutions or product sponsors. Our Qualified Opportunity Zone specialists can help clients with capital gains tax deferment and move their real estate into asset classes. Schedule a free 30-minute phone call with us today if you wish to know more.