What Is the Opportunity Zone 180-Day Rule?

The 2017 Tax Cuts and Jobs Act (TCJA) created Opportunity Zones to encourage investment in struggling neighborhoods by offering tax breaks. This program lets investors reduce their taxes by putting money into projects that aim to create jobs and improve these areas.

The Opportunity Zone 180-Day Rule is an important part of this program as it gives investors 180 days (about 6 months) from the day they make a profit from selling investments to reinvest that money into Qualified Opportunity Funds (QOF). By following this rule, investors can qualify for the tax benefits offered by the program.

If you’ve sold capital assets for gains in the past 180 days, or are planning on a sale in the near future, contact an Avidian Wealth Solutions advisor. We can help assess if a QOF investment fund is a suitable option for your portfolio.

The Opportunity Zone 180-Day Rule explained

The 180-Day Rule is a foundational element of the Opportunity Zone program. According to the Internal Revenue Service (IRS), this rule determines the timeframe within which investors must reinvest their capital gains into a Qualified Opportunity Fund (QOF) to be eligible for the program’s tax benefits.

As stated by the IRS:

“Generally, you have 180 days to invest capital gains in a QOF. The first day of the 180-day period is the date the gain would be recognized for federal income tax purposes.”

This means that investors typically have about six months from the date they realize a capital gain to reinvest that money into a QOF. However, the IRS notes that there are some exceptions and special rules:

1. For gains from pass-through entities (like partnerships or S corporations), the 180-day period generally starts on the last day of the entity’s tax year.
2. For gains from the sale of business property, investors can choose to start the 180-day period on the date of sale, the last day of the tax year, or the due date of the tax return.
3. For certain types of gains, such as those from regulated futures contracts, the 180-day period begins on the last day of the tax year.

It’s important to note that these rules can be complex, and the IRS recommends consulting with a tax advisor to ensure compliance with the 180-Day Rule and other Opportunity Zone regulations.

Qualified Opportunity Zone business examples

No matter which type of investment account or investment is being sold, you should carefully track your investment dates and consider your tax and financial risk management strategies before assuming you’re meeting the requirements for Opportunity Zone investments.

To better understand how the 180-Day Rule works in real-world situations, let’s look at some examples:

1. Sale of stocks or bonds

Scenario: An investor sells stocks on June 1, 2024, realizing a capital gain of $100,000.

Application: The investor has until November 28, 2024 (180 days from June 1) to invest the $100,000 gain into a Qualified Opportunity Fund (QOF) to defer the tax on this gain.

2. Real estate sale

Scenario: A property owner sells a rental property on December 15, 2024, with a capital gain of $500,000.

Application: The investor has until June 13, 2025 (180 days from December 15) to invest some or all of the $500,000 gain into a QOF.

3. Partnership distribution

Scenario: An investor receives a K-1 from a partnership showing their share of the partnership’s capital gain for the tax year ending December 31, 2024.

Application: In this case, the investor has three options for the start of their 180-day period:

1. The last day of the partnership’s tax year (December 31, 2024)
2. The due date of the partnership’s tax return without extensions (typically March 15, 2025)
3. The due date of the partnership’s tax return with extensions (typically September 15, 2025)

The investor can choose the most advantageous date, potentially giving them until March 13, 2026, to invest (180 days from September 15, 2025).

4. Installment sale

Scenario: An investor sells a business on an installment basis, receiving payments over several years.

Application: For each installment payment that results in a capital gain, a new 180-day period begins on the date of receipt. This allows the investor to invest gains from multiple payments into QOFs over time.

5. Section 1231 gains (business property)

Scenario: An investor sells business equipment on July 1, 2024, resulting in a Section 1231 gain.

Application: For Section 1231 gains, the 180-day period begins on the last day of the tax year (December 31, 2024, for most individuals). The investor would have until June 29, 2025, to invest the gain in a QOF.

How to file for Opportunity Zone tax returns

Filing tax returns for Opportunity Zone investments involves specific forms and procedures that should be verified with your financial advisor. 

Here’s a step-by-step guide to help you navigate the process:

1. Use Form 8949 to report the sale of your original asset that resulted in the capital gain you’re investing in a Qualified Opportunity Fund (QOF). You’ll need to indicate that you’re deferring the gain by investing in a QOF.
2. File Form 8997 with your federal income tax return for the year you invest in a QOF and each subsequent year until you dispose of the investment. Use it to report:

• New investments in QOFs
• Increases in investments
• Dispositions of investments
• The value of your QOF investments at the end of the tax year

3. File Form 1040 and attach Forms 8949 and 8997 to your Form 1040 when you file your annual tax return.

Be aware that state-level treatment of Opportunity Zone investments can vary. Some states conform to federal tax treatment, while others may have different rules. Before filing any forms, consult with a tax professional familiar with your state’s laws.

Things to keep in mind when filing Opportunity Zone tax returns

When filing for Opportunity Zone tax returns, try to keep the following points in mind:

1. These forms should be filed with your regular annual tax return. There’s no separate filing deadline for Opportunity Zone investments.
2. Keep track of your basis in the QOF investment. Your basis may increase after holding the investment for 5 years and again at 7 years, affecting your eventual tax liability.
3. When you sell or exchange your QOF investment, you’ll need to report this on your tax return and pay any applicable taxes.
4. Given the complexity of Opportunity Zone 180-Day Rules, it’s highly recommended to work with a qualified tax professional or CPA who has experience with these investments.
5. Maintain detailed records of your investments, including dates, amounts, and any correspondence with the QOF for accurate reporting.

Remember, tax laws and filing requirements can change. Always check the latest IRS guidelines or consult with a financial professional so you’re following the most up-to-date procedures for reporting your Opportunity Zone investments.

Opportunity Zone 180-Day Rule — FAQs

Are Opportunity Zones still in effect in 2024?

Yes, Opportunity Zones are still in effect in 2024. The program was established by the Tax Cuts and Jobs Act of 2017 and does not have a set expiration date. Investors can continue to take advantage of the tax benefits associated with Qualified Opportunity Fund (QOF) investments.

What happens to Opportunity Zones after 2026?

While the Opportunity Zone program doesn’t have a set end date, December 31, 2026, is the last day for deferred capital gains to be recognized and taxed, regardless of when the QOF investment was made.

After this date, new investments can still be made in Opportunity Zones, but the tax deferral benefit will no longer be available. The tax exclusion benefit for appreciation on the QOF investment (if held for at least 10 years) will continue to be available for investments made before June 29, 2027.

Can I invest only a portion of my capital gains into a QOF?

Yes, you can invest any amount of your eligible capital gains into a QOF. You’re not required to invest the entire gain. However, only the portion invested will be eligible for the tax benefits.

What if I miss the 180-day deadline?

If you miss the 180-day deadline, you cannot claim the tax deferral benefit for that particular gain. However, you may still be able to invest in a QOF; you just won’t receive the capital gains tax deferral on that specific investment.

How can investment management professionals assist with Opportunity Zone investments?

Professional investment management services can help identify suitable Qualified Opportunity Funds (QOFs), perform due diligence, and integrate these investments into your overall portfolio strategy or alternative investment solutions. 

They can also assist with compliance monitoring, performance tracking, and coordinate with tax professionals to optimize the tax benefits of your Opportunity Zone investments. Additionally, investment managers can provide valuable guidance on exit strategies as you approach the 10-year mark for maximum tax benefits.

Learn more: What is investment management?

Thinking about selling your capital assets for gains? Let’s talk.

The Opportunity Zone 180-Day Rule provides investors with a six-month window to reinvest their capital gains into Qualified Opportunity Funds, offering significant tax benefits. However, successfully plotting a course through the process requires professional guidance to ensure compliance and help maximize potential returns.

At Avidian Wealth Solutions, our team of experienced financial advisors can help you incorporate Opportunity Zone investments into your comprehensive investment plan, offering personalized strategies tailored to your unique financial goals. 

By partnering with Avidian, you gain access to our market knowledge, rigorous fund selection processes, and ongoing portfolio management — all designed to help you make the most of your Opportunity Zone investments while potentially reducing your tax burden.

Schedule a conversation with one of our advisors in Houston, Austin, Sugar Land, or The Woodlands to learn more!

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• Required Minimum Distribution Age: When Do RMDs Start?
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