Qualified Opportunity Zone Investment: Deferring and Reducing Capital Gains Through QOZ Funds

Qualified Opportunity Zone investment rules:

1. Only capital gains qualify. The gain invested in the QOZF must be a capital gain (short-term or long-term). Ordinary income and SE income don’t qualify.

2. 180-day investment window. The gain must be invested in a QOZF within 180 days of the sale that generated the gain. For partnership and S-Corp gains, the 180-day clock starts either from the entity’s sale date or from the last day of the entity’s tax year (the partner/shareholder can choose).

3. Deferral of original gain. The original gain is deferred until the earlier of: (a) December 31, 2026, or (b) the date the QOZF investment is sold. The deferred gain is recognized at that point, regardless of whether the QOZF investment has been sold.

4. 10-year hold for tax-free appreciation. If the QOZF investment is held for at least 10 years, all appreciation on the QOZF investment (above the deferred gain amount) is permanently excluded from income. There’s no limit on the exclusion amount.

5. Basis adjustments (original, no longer available): The original QOZ provisions provided a 10% basis step-up at 5 years and an additional 5% at 7 years. These step-ups expired December 31, 2026 for most investors, making the 10-year exclusion the primary remaining benefit.

6. What is a QOZF? A corporation or partnership that holds at least 90% of its assets in Qualified Opportunity Zone property. QOZ property includes real estate, business assets, and businesses located in designated census tracts.