OVERVIEW

  • Investors may defer taxes on eligible capital gains by investing in Qualified Opportunity Zones (QOZ) through Qualified Opportunity Funds (QOF).
  • Gains can be deferred, and if the QOF investment is held for at least 10 years, investors may elect a step-up in basis to fair market value to exclude appreciation after acquisition. The original deferred gain still becomes taxable.
  • Under the original TCJA rules, deferral lasts until an inclusion event or December 31, 2026. A 2025 law (“OZ 2.0”) introduces a new framework after 2026, but the 2028 extension was not included.
  • A 5-year hold provides a 10% reduction in the recognized gain.
  • The 7-year, 15% basis increase applied only to investments made early enough to reach seven years by December 31, 2026. It does not apply to new investments made under the 2025 rules.
  • A hold of 10 years or more allows investors to elect a basis step-up to fair market value so post-acquisition appreciation is excluded. Under the 2025 law, this step-up is capped at the 30-year anniversary.
  • Only eligible gains (such as capital gains and certain net Section 1231 gains) qualify for deferral. Non-gain amounts may be invested in a QOF, but they do not receive Opportunity Zone tax benefits.

Many investors look for strategies that could lower taxes while supporting economic development. Qualified Opportunity Zones (QOZ) were designed to address both goals.

Created under the Tax Cuts and Jobs Act of 2017, QOZs are designated communities that the federal government identified as needing long-term investment. These areas are nominated by states and certified by the U.S. Treasury. Today, there are 8,764 zones spread across all 50 states, the District of Columbia, and five U.S. territories.

The program encourages investors to place eligible gains into Qualified Opportunity Funds (QOFs). In return, investors may receive significant tax advantages, and communities may benefit from new business activity, development, and jobs.

Try Smart Yield >
Put Your Cash to Work With Smart Yield

Put Your Cash to Work With Smart Yield

Smart Yield is our alternative to a high-yield savings account— automatically allocate your cash to strategic money market funds designed to help you keep more of what you earn, potentially with zero federal, state, or local taxes¹

LEARN MORE

¹Smart Yield investment products are not FDIC insured and may carry risk. Past performance does not guarantee future results. Any yields offered exclude advisory fees and Carry’s membership fee. The service is offered by Carry Advisors LLC, our SEC-registered investment adviser, with brokerage services provided by Global Carry LLC and DriveWealth LLC, members FINRA/SIPC. See Smart Yield full disclosures and Carry Advisors Form ADV and CRS.

If you are exploring ways to manage taxable gains or diversify into real estate and private investments, understanding how QOZs work could be worth your time. Keep reading to see how the program functions, the key rules, and the potential pros and cons before deciding whether it fits your financial strategy. 

📌 You can view an interactive map of all opportunity zones on the US Department of Housing and Urban Development website.

How to Invest in a Qualified Opportunity Zone

To invest in a Qualified Opportunity Zone (QOZ), you must go through a Qualified Opportunity Fund (QOF). These funds are organized as corporations or partnerships and follow specific IRS requirements to qualify. You can either invest in an existing fund or create one yourself.

Creating your own QOF

Some investors prefer to set up their own QOF. In this case, the fund must be structured as a corporation or partnership, which includes an LLC electing partnership treatment. The fund becomes official through self-certification by filing Form 8996 with its federal tax return each year.

To remain compliant, a QOF must keep at least 90% of its assets in Opportunity Zone property. Properties generally need to be new or substantially improved. “Substantial improvement” means the investor must spend more on upgrades than the property’s adjusted basis (excluding land) within 30 months. Under the 2025 rules, qualified rural funds have a reduced improvement requirement of 50%.

📝 Note: Managing your own QOF involves strict compliance and reporting. Investors often engage professional counsel to avoid costly mistakes.

✏️ Hypothetical Example: 

Imagine an investor forms an LLC to qualify as a QOF and files Form 8996. They purchase a warehouse in a QOZ valued at $1,000,000 (excluding land). To meet the substantial improvement rule, they would need to invest more than $1,000,000 in renovations within 30 months.

Investing in Ready-Made QOFs

Not all investors want to create and manage their own fund. Another approach is to place money into a QOF already established by an investment firm. Many of these funds are offered under SEC Regulation D and are limited to accredited investors, though structures can vary.

Key things to know about existing QOFs:

✅ They range in size from smaller niche funds to those managing over $100 million.

✅ Industry reports (e.g., Novogradac) show more than 2,000 QOFs with about $40–$41 billion in total equity raised as of 2025.

✅ Each fund may focus on different property types or geographic areas, which can influence both risk and return potential.

📝 Note: Before investing, review a QOF’s offering documents and strategy, as outcomes can vary widely depending on the manager and underlying projects.

How to Elect Tax Deferral with the IRS

If you invest in a Qualified Opportunity Fund (QOF) and want to defer eligible capital gains, you must notify the IRS. This is done by filing the correct forms with your federal tax return.

Investors are generally required to file:

Form 8949 – to elect the deferral of capital gains for the tax year in which the gain would normally have been recognized.

Form 8997 – to report contributions to QOFs and track investments over time.

Both forms must be included with your annual tax filing.

If You Already Filed Your Taxes

Sometimes investors decide to elect deferral after filing their return. In this case, there are still options:

  • Individuals can file an amended return with the proper forms attached.
  • Partnerships may need to submit an Administrative Adjustment Request (AAR) with a completed Form 8949 election.

📝 Note: Filing corrections adds complexity, so many investors consult a tax professional to ensure accurate reporting.

Tax Breaks of Opportunity Zones

Investing in a Qualified Opportunity Fund (QOF) can provide tax advantages. The benefit you receive depends on how long you hold the investment.

Main Tax Benefits

1. Tax deferral on eligible gains

If you reinvest gains into a QOF within 180 days, taxes on those gains are deferred until an inclusion event (such as selling your QOF investment) or December 31, 2026.

Under the new rules introduced in 2025, future investments follow a revised framework. The old 5% and 10% step-ups tied to pre-2026 deadlines no longer apply. Instead:

  • A 5-year hold provides a 10% reduction in deferred gain.
  • Qualified rural funds offer a larger benefit with a 30% reduction after five years.

📝 Note: Ordinary income like wages or interest does not qualify. Only certain capital gains are eligible for deferral.

2. Exclusion of future appreciation

If you hold your QOF investment for at least 10 years, you may elect to step up basis to the fair market value at the time of sale. This means the growth in value after your purchase could be excluded from tax.

The original deferred gain is still recognized, but appreciation beyond that amount may be excluded. A 2025 rule change caps this benefit by freezing the step-up at year 30, even if you hold the investment longer.

📝 Hypothetical Example:

Imagine you sell stock and realize a $100,000 capital gain. Instead of paying tax immediately, you invest that $100,000 into a QOF.

  • If you hold the investment for 5 years in a regular fund, only $90,000 of the original gain may be taxable. In a qualified rural fund, just $70,000 could be taxable.
  • If you hold for 10 years and the investment grows to $160,000, you may exclude the $60,000 in appreciation from tax. The $90,000 (or $70,000 in rural funds) would still be recognized under the rules.

Risks and Drawbacks of Opportunity Zone Investments

Qualified Opportunity Funds (QOFs) offer unique tax incentives, but they also carry risks that may not be present in more traditional investments. Understanding these risks can help investors make more informed decisions.

Here are a few risks that potential investors in this alternative asset class should be aware of.

Limited track record

Opportunity Zones were introduced in 2017, so there’s less historical performance data compared to established markets like traditional real estate or equities. Investors are working with a shorter timeline of results.

Possibility of lower-than-expected returns

Government rules restrict what QOFs can invest in. These limits may reduce flexibility, which could result in returns that fall below expectations.

Higher costs

Operating a QOF typically involves legal, compliance, and administrative expenses. These costs may be passed on to investors, making them higher than standard investment vehicles.

Concentration risk

Many funds focus on specific projects or geographic areas. With ~2,000+ tracked QOFs of varying sizes and strategies, a project-heavy or location-specific portfolio may increase risk.

📝 Note: Investors should weigh these risks against the potential tax benefits, and consider how an Opportunity Zone allocation fits into their broader portfolio strategy.

Who Might Consider Opportunity Zone Investments

Opportunity Zones are not designed for everyone. They’re typically best suited for investors who have recently realized significant capital gains and are looking for ways to reinvest those funds while deferring taxes.

When It May Make Sense

Investing in a Qualified Opportunity Fund (QOF) could be worth considering if:

  • You recently sold a business, real estate, or other assets and realized a large gain within the last 180 days.
  • You do not need immediate access to those funds for personal use.
  • You are interested in long-term real estate or development exposure, with the potential for tax advantages.
  • You are comfortable with the higher risks that come with alternative investments.

Portfolio Fit

Allocating a portion of the capital you already set aside for alternative assets and real estate into Opportunity Zones may provide tax benefits alongside exposure to projects in targeted communities. This approach helps ensure that only the part of your portfolio designed for higher-risk opportunities is used.

📝 Note: Because Opportunity Zone investments are complex and concentrated, consult experienced professionals, such as tax advisors and financial planners, before committing funds. They can help you evaluate whether this strategy fits your financial goals and risk tolerance.

In Summary

Qualified Opportunity Zones (QOZs) offer a way to defer certain capital gains and potentially reduce future tax liabilities, but they also come with unique risks. The program was created to encourage private investment in designated communities, and the rules around holding periods, deferrals, and basis adjustments determine the extent of the tax benefits.

For some investors, particularly those with recently realized gains, placing funds into a Qualified Opportunity Fund (QOF) may align with broader financial strategies. Others may find the risks, costs, or limited track record less suitable for their goals. 

Before making decisions, review how this type of investment fits into your portfolio and speak with experienced professionals who can evaluate the details of your situation.


Disclaimer:

The Carry Learning Center is operated by The Vibes Company Inc. (“Vibes”) and contains generalized educational content about personal finance topics. While Vibes provides educational content and technology services, all investment advisory services discussed on this website are provided exclusively through its wholly-owned subsidiary, Carry Advisors LLC (“Carry Advisors”), an SEC registered investment adviser. The information contained on the Carry Learning Center should not be construed as personalized investment advice and should not be considered as a solicitation to buy or sell any security or engage in a particular investment, accounting, tax or legal strategy. Vibes is not providing tax, legal, accounting, or investment advice. You should consult with qualified tax, legal, accounting, and investment professionals regarding your specific situation.

The accounts, strategies and/or investments discussed in this material may not be suitable for all investors. All investments involve the risk of loss, and past performance does not guarantee future results. Investment growth or profit is never a guarantee. All statements and opinions included on the Carry Learning Center are intended to be current as of the date of publication but are subject to change without notice.

To access investment advisory services through Carry Advisors, you must be a client of Vibes on an eligible membership plan. For more information about Carry Advisors’ investment advisory services, please see our Form ADV Part 2A brochure and Form CRS or through the SEC’s website at www.adviserinfo.sec.gov.