The opportunity zone incentive lets a taxpayer defer (and potentially reduce or eliminate) eligible capital gain by reinvesting it through a tiered structure. The chart tracks the capital as it cascades downward: an investor rolls a capital gain from a sale to an unrelated party into a Qualified Opportunity Fund (QOF), the QOF deploys at least 90% of its assets into qualified opportunity zone property, and that property is ultimately used in an active trade or business conducted within the Opportunity Zone (“OZ”).
Each layer carries its own eligibility checklist. The investor must start with capital gain from a sale to an unrelated party, invest within the 180-day window, and make the election on the tax return. The QOF must be a partnership or corporation formed for the purpose of investing in QOZ property, elect QOF status, and satisfy the 90% asset test — measured against QOZ stock, a QOZ partnership interest, or QOZ business property.
Below the fund, the entity requirements govern the QOF’s investment in a portfolio company: the interest must be acquired for cash at original issue after 12/31/17, the entity must be a QOZ business at acquisition, and it must remain a QOZ business during more than 90% of the QOF’s holding period. The portfolio company in turn must run a QOZ business — a trade or business in which more than 70% of tangible property is QOZ business property, at least 50% of income comes from active conduct in the OZ, a substantial portion of intangibles is used in the active business, nonqualified financial property is kept under the 5% limit, and no “sin” business is conducted.
Finally, the tangible assets themselves must meet the QOZ business property tests: used in the business, acquired by purchase from an unrelated seller (or by lease) after 12/31/17, subject to an original-use or substantial-improvement requirement in the OZ, and used in the OZ for more than 90% of the QOF or QOZ business holding period.
The incentive starts with capital gain from a sale to an unrelated party; the investor has 180 days to roll it into a QOF and must make the election on the tax return.
A QOF must be a partnership or corporation that elects QOF status and invests at least 90% of its assets in QOZ property — QOZ stock, a QOZ partnership interest, or QOZ business property.
The QOF must acquire its interest for cash at original issue after 12/31/17, and the entity must be a QOZ business at acquisition and during more than 90% of the QOF’s holding period.
A QOZ business needs >70% QOZ business property, 50% active-conduct income in the OZ, limited nonqualified financial property, and no sin business; the tangible property must be purchased or leased after 12/31/17 and originally used or substantially improved in the OZ.
