Qualified Opportunity Zones

Jeff Patterson and Dan Eller

Schwabe, Williamson & Wyatt

As part of the 2017 tax reform enacted as the Tax Cuts and Jobs Act (“TCJA”), the Internal Revenue Code (the “Code”) was further amended to add Sections 1400Z-1 (designating qualified opportunity zones (“QOZs”)) and 1400Z-2 (deferral of certain gains related to investments in a qualified opportunity fund (a “QOF”)). This article is the first in a series of at least two articles intended to provide an overview of QOZs and QOFs. In this article, we will provide a brief overview of QOZs and their establishment, before moving to the three primary tax benefits of investing into QOFs. In future writings, we will focus on regulatory and other guidance promulgated by the Department of Treasury (“Treasury”) and the Internal Revenue Service (“IRS”).


The TCJA ushered in sweeping changes to the Code. Some commentators have noted the provisions of TCJA are the most significant since 1986. For some, including ourselves, the QOZ and QOF provisions did not receive much initial attention.[1] As we moved into early- to mid-2018, however, it was clear qualified opportunity zones were going to be a hot topic. By August of 2018, opportunity zone conferences were springing up locally and nationally. Interest was high – and has remained high to the date of the publication of this article. We are receiving regular inquiries from area potential clients and receiving referrals many tax and financial referral partners. This is a hot topic.

Establishing QOZs

The TCJA provided 90 days from in its enactment during which the chief executive officer of each State would nominate for designation as a QOZ certain tracts, and to notify the Secretary of the Treasury of those nominations.[2] The tracts were required to be in “low-income communities,” which were defined to have the same meaning as used in Section 45D(e) (New Markets Tax Credits).[3] Once designated, those tract designations would remain in effect until December 31, 2028.[4]

In Oregon, Treasury confirmed Governor Brown’s designation of 86 tracts around the State, 31 of which are located in the Portland metro area.[5] The Treasury Community Development Financial Institutions Fund (“CDFIF”) maintains a website[6] that includes an Excel spreadsheet detailing the tract designations. CDFIF also maintains a webpage that includes a dynamic mapping system to assist in identifying where the tracts are in a visual presentation.[7] Those resources are the go-to sources for identifying where QOZs are located.

Practice Tip: Whether or not a particular parcel is located in a QOZ is a threshold requirement of the tax benefits described below. You should work with your clients to ensure the parcel is in a low-income community. Check and double check its location against the resources available from Treasury, the IRS, and CDFIF.

Three Primary Tax Benefits of QOFs

Our initial conversations with potential clients and referral partners invariably seemed to start with or include a discussion of a commonly held misunderstanding of QOF investments: people believe investments into QOFs result in no tax being paid. Ever. That is fundamentally incorrect. QOF investments involve at least three primary tax benefits,[8] each of which will be discussed in turn.

Benefit Number One: Deferral

Although we will describe in a future article how QOF investments may be structured, for purposes of this articles it is enough to know that the taxpayer will realize gains from one or more other transactions, and invest some or all of that gain[9] into a QOF (this investment is the “QOF investment”). The taxpayer will have a zero basis in the QOF investment, usually the interest the taxpayer takes in the QOF.[10] We should expect that the taxpayer would have a taxable gain at some point, absent some other provision to the contrary. This is where Section 1400Z-2 comes into play.

Sections 1400Z-2(a) and (b) provide that certain capital gains may be deferred for income tax purposes until the later of a sale or exchange of the QOF investment or December 31, 2026. At its heart, therefore, a QOF investment should be viewed as a deferral mechanism, not a gain elimination device. The reasons why taxpayers believe otherwise flow from the following two potential tax benefits.

Benefit Number Two: Basis Increase

The second primary tax benefit of QOF investments is the ability to increase the taxpayer’s basis in the capital gain portion of the QOF investment from zero to some other amount. In particular, Section 1400Z-2(b)(2)(B)(iii) provides the taxpayer’s basis will increase from zero to 10% of the deferred gain if the taxpayer holds the QOF investment for five years. Additionally, if the taxpayer holds the QOF investment for seven years, the basis boost is up to a total of 15%. Recall the deferral mechanism of Section 1400Z-2(b)(1) is only through as late as December 31, 2026. For tax reasons, in order to obtain a basis boost in the amount of 15%, the taxpayer will need to make the QOF investment by December 31, 2019. Note, time is quickly running out.

Practice Tip: If you have been discussing QOF investments with clients, you should alert them to this important December 31, 2019, “deadline.” Failure to make a QOF investment by that date can lead to the loss of up to 5% of the basis boost described above.

Benefit Number Three: Future Gain Exclusion

The final primary tax benefit is complete gain exclusion for QOF investments held for at least ten years.[11] Section 1400Z-2(c) provides the taxpayer’s basis in the QOF investment will be increased to the fair market value of that QOF investment on the date of the sale or exchange of that QOF investment. This is true as to any QOF investment, so long as the ten years runs and the QOF investment is sold or exchanged before the statutory sunset date for these provisions, which is currently December 31, 2047.[12]

This third benefit appears to be the source of the misconception regarding the taxation of QOF investments. People hear “gain exclusion after ten years” and think they only need to hold the QOF investment for ten years in order to escape taxation on the entire amount of gain invested in the QOF. That cannot be true, however, due to the deadline established in the first tax benefit (above). December 31, 2026 is in all cases less than ten years away from any QOF investment; therefore, some amount of gain must be recognized (as little as 85%) before the gain exclusion and any other upside appreciation in the QOF investment may be excluded.

Practice Tip: In describing the primary tax benefits associated with QOF investments, it is important to work through all three of those benefits. The taxpayer must understand a recognition event is sitting out there in as late as the 2026 tax year. The taxpayer needs to plan for that. If 100% of the proceeds of the transaction giving rise to the capital gain are invested in the QOF, the taxpayer may be forced to liquidate some or all of that investment (thereby eliminating the ability to achieve the third benefit); or use funds from some other source to fund the tax obligation. That could lead to cash-flow issues in late 2026/early 2027.


In summary, in this article we summarized the basics surrounding qualified opportunity zones and their designation. We described the primary tax benefits associated with QOF investments and dispelled some common myths related to the perceived tax benefits of those investment. In future writings, we will delve into Treasury guidance, as well as other topics related to qualified opportunity zones. If you have an interest in any particular topic, please let us know.

[1] Our initial summary of the TCJA included zero references to opportunity zones. See https://www.schwabe.com/newsroom-publications-14837.

[2] 26 U.S.C. §§ 1400Z-1(b), (c)(2)(B).

[3] 26 U.S.C. § 1400Z-1(c)(1).

[4] See 26 U.S.C. § 1400Z-1(f).

[5] See https://www.kgw.com/article/money/business/oregon-picks-prime-portland-real-estate-for-opportunity-zone-program/283-556720559.

[6] Available at https://www.cdfifund.gov/Pages/Opportunity-Zones.aspx. The IRS also published Notices in 2018 (2018-48) and 2019 (2019-42) regarding the designation of the tracts.

[7] Available at https://www.cims.cdfifund.gov/preparation/?config=config_nmtc.xml.

[8] For purposes of this articles, we are focused on federal income tax benefits of investment in QOFs. A future article will address how Oregon treats or plans to treat such investments.

[9] Later IRS guidance cleared up doubts as to which type of gain, concluding that Section 1400Z-1(a) is meant to apply to capital gains. That guidance will be discussed in a future article.

[10] This zero basis relates to the portion of the QOF investment related to the taxpayer’s capital gain. To the extent the taxpayer invests additional property in the QOF (which is permitted but has consequences as to the tax treatment of that additional investment), the taxpayer may have basis related to that additional investment.

[11] 26 U.S.C. § 1400Z-2(c).

[12] This date is set forth in the first round of proposed Treasury Regulations, to be discussed in a future article. Those regulations are available at https://www.irs.gov/pub/irs-drop/reg-115420-18.pdf.