The federal Qualified Opportunity Zone (QOZ) program offers one of the most powerful real estate and investment tax incentives in the country. Designed to drive economic growth in designated low-income areas, the program rewards investors who reinvest capital gains into Qualified Opportunity Funds (QOFs) by deferring and potentially eliminating capital gains taxes. Set to expire soon but subject to potential expansion under pending legislation. Here’s the current overview…
Opportunity Zones Explained: How to Defer and Potentially Eliminate Capital Gains Taxes in Real Estate
Opportunity Zones Explained: How to Defer and Potentially Eliminate Capital Gains Taxes
The federal Qualified Opportunity Zone (QOZ) program offers one of the most powerful real estate and investment tax incentives in the country. Designed to drive economic growth in designated low-income areas, the program rewards real estate sellers and other types of investors who reinvest capital gains into Qualified Opportunity Funds (QOFs) by deferring and potentially eliminating capital gains taxes. With enormous appreciation in areas like Newport Beach, this can be an outstanding way to defer potentially significant capital gains and even obtain further appreciation tax free.
At Lucas Real Estate Group, we regularly work with property owners and investors seeking to maximize capital gains strategies. Here’s what you need to know about Opportunity Zones and how they might benefit you.
What Is an Opportunity Zone?
Opportunity Zones are census tracts designated by the federal government as economically distressed. The 2017 Tax Cuts and Jobs Act created the Opportunity Zone program to spur long-term private investment and development in these areas.
There are over 8,700 designated Opportunity Zones across the U.S., including many throughout California and a few locally including in Costa Mesa, Santa Ana, Long Beach and elsewhere. You can find Opportunity Zones in both urban and rural settings, and many are in locations experiencing rapid revitalization.
What Is a Qualified Opportunity Fund (QOF)?
To invest in Opportunity Zones and receive the tax benefits, investors must use a Qualified Opportunity Fund (QOF). A QOF is an investment vehicle organized as a corporation or partnership for the purpose of investing in Opportunity Zone property. Individuals can create their own QOF or invest in an existing one.
The Tax Benefits of Investing in a QOF
- Capital Gains Deferral
If you sell an asset—real estate, stocks, a business, cryptocurrency, etc.—and realize a gain, you can defer the tax on that gain by reinvesting it into a QOF within 180 days. The tax is deferred until the earlier of December 31, 2026, or the date you sell your QOF investment. This looming deadline is subject to potential expansion. - Reduction of Taxable Gain (Expired for New Investments)
For earlier investments, there were step-ups in basis after 5 and 7 years, reducing the original gain subject to tax. While these have expired, the primary benefit remains. - Tax-Free Growth
If you hold your QOF investment for at least 10 years, any gain from the appreciation of that Opportunity Zone investment is completely excluded from federal capital gains tax.
Example: If you invest $1 million in a QOF and it grows to $3 million over 10+ years, you pay no federal tax on the $2 million gain.
What Types of Gains Qualify?
Eligible gains include capital gains from nearly any source:
- Real estate sales
- Stocks and bonds
- Cryptocurrency
- Business sales
- Art and collectibles
These gains must be invested into a QOF within 180 days to qualify for the deferral.
Real Estate and Business Investment Potential
Once invested, the QOF must deploy the funds into qualifying Opportunity Zone property. This can include:
- Ground-up development or substantial improvement of real estate
- Operating businesses located within Opportunity Zones
For real estate investors, the program creates a unique chance to roll proceeds from a sale into new development or redevelopment projects—without using a 1031 exchange.
Do I Need to Use a Third-Party Fund?
No. Many investors set up their own QOFs to maintain control and tailor their strategy. While others prefer to invest in larger funds with significant expertise in the development project.
California Conformity
California does not conform to the federal Opportunity Zone tax benefits. This means you may still owe California state capital gains tax on the original gain, even if it is deferred for federal purposes. However, the federal benefits alone can still be significant.
Is the Program Ending?
Under current law, you can defer gains invested in a QOF until December 31, 2026. However, pending legislation aims to extend and improve the program—possibly adding back the 5- and 7-year benefits and pushing out the deferral deadline.
There is bipartisan support for expanding the program, and many experts expect action within the next year. If you’re considering a capital gain investment, now is a smart time to explore your options.
Sources and Citations
- IRC §1400Z-2 – Opportunity Zone Program
- IRS Form 8996 Instructions
- IRS Opportunity Zone FAQ
- Census Tract Maps and Resources
Questions or Need Help?
Thinking of selling California real estate, we would love the opportunity to assist – we provide full service sales and property management in Newport Beach, Costa Mesa and surrounding areas. For a free brief consultation, contact us anytime:
Email: info@lucas-real-estate.com
Phone: (949) 478-1623
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— Devin Lucas
Real Estate Broker, REALTOR®, and Real Estate Attorney
Lucas Real Estate Group, in partnership with Coldwell Banker Newport Beach and the Coldwell Banker Global Luxury program, offers unmatched expertise in California real estate sales, property management, and real estate tax planning strategies, including Propositions 13, 58, 193, 60, 90, and new Proposition 19.
Want to discuss real estate laws, tax planning, tax considerations, private sales, intra family sales, or real estate legal matters? We conduct paid one-hour confidential consultations via Zoom, walking families through Prop 19 impacts, potential tax exposure, capital gains considerations, and the pros and cons of gifting, sales, LLCs, or hybrid solutions. For discussions requiring real estate legal advice, private family sales, family transfers, or tax-related matters, please schedule a paid one-hour consultation via Zoom, phone, or in person using this calendar (Book a consultation here.) Upon booking, you’ll receive instant confirmation and a Zoom link if applicable.
Thinking of selling California real estate or seeking a new property management company? We would love the opportunity to assist – we provide full service sales and property management in Newport Beach, Costa Mesa and surrounding areas. If you are seeking to sell or professionally manage your home in Newport Beach, Costa Mesa or the surrounding areas, call or email anytime for a free brief consultation – info@lucas-real-estate.com or 949-478-1623.
