Do you have substantial capital gains burning a hole in your pocket? Would you rather avoid paying the tax due on them right now?

If so, you should look at qualified opportunity funds—businesses that invest in qualified opportunity zones.

 

Although some of the tax benefits of qualified opportunity funds are no longer available for new investors, they can still provide significant tax deferrals and tax reductions for all types of capital gains. Here’s how they work:

 

• Within 180 days after you realize a capital gain, you invest all or part of the proceeds with a qualified opportunity fund.

• You defer your invested capital gain and include it in your 2026 taxable income.

• If you hold your qualified opportunity fund investment for 10 years before selling it, you pay no tax on the profits (this likely makes the deal).

• You don’t need to sell your qualified opportunity fund investment after 10 years. You could, for example, hold it until 2047, sell it then, and owe no taxes on the profits.

 

Taxpayers who invested before 2022 could also get a step-up of 10 to 15 percent of their basis in their investment after five to seven years, effectively eliminating a portion of their original gain. This benefit is no longer available to new investors, but bipartisan legislation has been introduced to revive it.

 

Unlike Section 1031 exchanges, which you can use only for real estate, you can invest capital gains from any asset sale in qualified opportunity funds, including those from the sale of real estate, stocks, business assets, collectibles, precious metals, and cryptocurrency. There is no limit on the amount of capital gains you can invest. It makes no difference if the gains are long or short term.

 

So what’s the catch? The catch is that qualified opportunity funds can invest only in qualified opportunity zones—8,764 census tracts in all 50 states that are mostly low income. Does this mean you’ll have to invest in high-crime inner cities or severely economically depressed rural areas? Not necessarily. Nearly 200 of the zones are adjacent to poor areas but are not themselves low income.

 

Most qualified opportunity funds concentrate their investments in the better zones that present less risk. Indeed, the top 1 percent of zones received 42 percent of all the investments.

 

Nevertheless, exercise extreme care before investing in any qualified opportunity funds, because they are unregistered private placement investments outside of SEC oversight. And these funds aren’t rated by fund rating agencies such as Morningstar, Lipper, and S&P.

 

Many funds charge investors substantial fees that eat into investment gains. Before handing over your money, make sure you’re comfortable with a fund’s management team, investment strategy, and potential returns and fees.

 

If you want to discuss qualified opportunity funds, please call me on my direct line at 610-278-8400.