Investors who placed realized capital gains into Qualified Opportunity Funds under the Tax Cuts and Jobs Act of 2017 will see their tax deferral period expire at the conclusion of this year. The Treasury Department’s Office of Tax Analysis reported that the aggregate value of deferred gains in these funds totaled $75 billion as of the end of 2024.
Opportunity Zones were established as a policy tool to encourage investment in economically distressed communities designated by states and certified by the Treasury Department. Investors in Qualified Opportunity Funds that hold their investments for a full decade are eligible for tax-free gains on their returns. Additionally, those who deferred capital gains from other investments into these funds have been able to postpone their tax obligations, with varying degrees of basis step-ups depending on when they made their investment.
Approximately 12,800 Qualified Opportunity Funds exist with roughly 41,000 investors, of whom about 85 percent are individuals. The typical individual investor reported adjusted gross income of $738,000 in 2024. Investors who entered by the end of 2019 received a 15 percent basis step-up, reducing taxable gains to 85 percent of their deferred amounts. Those who invested by the end of 2021 qualify for a 10 percent step-up, while later investors receive no additional benefit beyond the deferral itself.
Legislation enacted last summer made Opportunity Zones permanent and modified future tax incentives. Beginning in 2027, new investment guidelines will provide all investors with a five-year deferral period followed by a 10 percent basis step-up, regardless of investment timing. Investors in rural-focused funds will receive a 30 percent step-up on their originally deferred gains after five years, providing additional incentives for agricultural and rural development initiatives.
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