Investing in assets like real estate, stocks, and bonds can be a great way to grow one’s income, but that growth comes with a catch—capital gains tax. If you sell those assets for a profit, you could face a capital gains tax of up to 37%, depending on how long you held onto the assets. Being subjected to capital gains taxes can be discouraging, but it shouldn’t prevent you from making investments that can benefit you in the future. Instead, you should look for ways to minimize or delay that tax—such as investing in an Opportunity Zone.
Opportunity Zones are economic development tools that let people invest in the United States’ distressed areas. These areas not only give investors tax benefits, but they’re also designed to increase economic growth and create jobs in low-income communities.
Keep reading to learn more about Opportunity Zones, how they work, the pros and cons, and more.
What Is an Opportunity Zone?
An Opportunity Zone (OZ) is a designated economically distressed area where investors can get a tax benefit if they invest their capital gains in qualifying businesses and projects, according to the Internal Revenue Service (IRS). Created through the Tax Cuts and Jobs Act of 2017, the Opportunity Zone program was designed to encourage private funding to be put into low-income areas throughout the US. When implemented successfully, an OZ can help create jobs, build housing, and drive economic development in underserved locations.
Though the OZ program's tax benefits were originally set to expire on December 31, 2026, the One Big Beautiful Bill Act, signed in 2025, put them back on the table permanently for potential investors.
How Do Opportunity Zones Work?
Investing in OZs is a multi-step process that begins with generating a capital gain—you can only leverage Opportunity Zone-based tax incentives by acquiring properties with capital gains. You could generate a capital gain by selling stocks or bonds, an investment property, a business, or some other appreciated asset. Either way, you have to invest in an OZ within 180 days of the sale of the appreciated asset.
Invest in a Qualified Opportunity Fund
Once you’ve realized a capital gain, you next have to invest it in a Qualified Opportunity Fund (QOF). This is an entity that’s created for the sole purpose of investing in an OZ property or business. A QOF can invest in properties such as commercial real estate buildings, multi-family housing, and mixed-use developments along with startup companies and businesses that are currently operating.
There are two key things to keep in mind with QOFs—capital gains must typically be reinvested in a QOF within 180 days. Additionally, QOFs must keep at least 90% of their assets invested in a Qualified Zone property, per the IRS.
More information here:
10 Tax Advantages of Real Estate — How Many Can You Name?
How to Reduce Your Investment Taxes
QOF Invests in a Qualified Opportunity Zone
After you've invested in a QOF, the fund will then invest in a qualified OZ. There are currently more than 8,700 designated OZs throughout the US and its territories, according to the IRS.
Hotels, office buildings, apartment buildings, manufacturing facilities, and empty properties designated for redevelopment are among the types of properties that could qualify as an OZ project.
Tax Benefits of Opportunity Zones
You’ll find several tax advantages when you invest in an OZ.
Temporary Capital Gains Taxes Deferral
You can temporarily defer your initial capital gains tax until an event occurs that decreases or terminates the qualifying investment in the QOF, or December 31, 2026—whichever occurs first.
Reduced Deferred Tax Liability
How long you hold the QOF investment will determine your tax benefit. For example, if you hold a QOF investment for at least five years, the basis of the investment increases to 10% of the deferred gain. If you were to hold a QOF investment for at least seven years, the basis increases to 15% of the deferred gain.
Meanwhile, if you hold your QOF investment for at least 10 years, you can opt to adjust the basis of the investment to its fair market value on the day it's sold or exchanged, according to the IRS.
Tax-Free Growth on New Capital Gains
Holding your OZ investment for at least 10 years also gives you the opportunity to exclude any appreciation the property generates from federal capital gains taxes.
So, if you put a $500,000 capital gain into a QOF and it increased to $1.5 million over 10 years, the extra $1 million could potentially be obtained tax-free from a federal standpoint.
Disadvantages of Opportunity Zones
Opportunity Zones provide an opportunity to minimize capital gain taxes, diversify your portfolio, and invest in an underserved community. There are also several potential downsides to using this method to expand your net worth, however:
Investment Risk
QOFs, by rule, have to be invested in economically distressed areas. While the idea is that your investment will help improve the community, there are no guarantees that it will happen, and you could face a lower return than if you had made a more conventional investment—even if it is subject to greater capital gains tax.
Long Commitment
To make this investment work, you need to be in it for the long haul. That means holding the investment and not having access to that cash for at least a decade to avoid the capital gains taxes from your OZ investment.
Potential Penalties
Remember, QOFs must keep at least 90% of their assets invested in a quality OZ property, per IRS rule. Falling below that threshold could result in penalties that could cancel out the tax benefits you sought when you started this investment. Additionally, your OZ investment could garner more IRS attention, given how much money is typically involved in these deals.
Legal Uncertainty
You may like the tax benefits that come from investing in an OZ now, but they aren’t written in stone. Congress could change tax laws at some point, which could reduce those benefits or make it harder to qualify for them.
Unintended Consequences
OZs are meant to generate more affordable housing, but investments often go toward luxury residences or high-end commercial projects. When this happens, the cost of living goes up, and low-income residents and small businesses are priced out. Additionally, newly created jobs from OZ investments might go to commuters rather than community residents due to a disconnect between job requirements and residents’ skill sets.
More information here:
The Real Reason for the Housing Unaffordability Crisis
I Want to Invest in Real Estate, But I Also Want to Be Totally Lazy About It: What Are My Options?
Should You Invest in Opportunity Zones?
As an investor, you could benefit from the tax advantages OZs provide. Investing in them also gives you the chance to help improve an economically distressed and underserved community while expanding your portfolio.
Just remember, like with any investment, there’s no guarantee you’ll get a return with this venture. There’s also a higher degree of difficulty for success because your capital gain is being invested in an economically distressed area, so a revitalization is anything but certain. OZ investors can also face criticism as the projected benefits don’t always reach local residents and can sometimes have the opposite effect they’re supposed to, pricing out community members and small businesses and eliminating affordable housing.
If you opt to go down this investment road, consult a tax professional. OZ investing comes with a lot of regulations and deadlines—making a mistake could be costly and reduce the capital gains you worked so hard to protect.
The White Coat Investor is filled with posts like this, whether it’s increasing your financial literacy, showing you the best strategies on your path to financial success, or discussing the topic of mental wellness. To discover just how much The White Coat Investor can help you in your financial journey, start here to read some of our most popular posts and to see everything else WCI has to offer. And make sure to sign up for our newsletters to keep up with our newest content.