Opportunity Zones are a tax incentive program established by the Tax Cuts and Jobs Act of 2017. They aim to stimulate economic development in economically distressed communities across the United States. Designed to encourage investment in these communities, Opportunity Zones provide a unique opportunity for taxpayers to significantly reduce or even eliminate taxes on capital gains. In this article, we’ll explore how Opportunity Zones work, the tax benefits available to taxpayers, and how high-net-worth individuals and business owners can strategically use Opportunity Zones to reduce their tax liabilities.
Can I Use Opportunity Zones to Save Taxes?
Yes, Opportunity Zones can be a valuable tool for saving taxes, particularly when it comes to capital gains. The tax law allows taxpayers who invest in designated Opportunity Zones to defer and reduce the taxes they owe on capital gains. When a taxpayer sells an asset and realizes a capital gain, they are typically subject to taxes. However, if that gain is reinvested into a Qualified Opportunity Fund (QOF), taxpayers can defer their capital gains taxes until the earlier of the date they sell their QOF investment or December 31, 2026. Moreover, if the investment is held for at least 10 years, any additional gains from the Qualified Opportunity Fund are eligible for exclusion from capital gains taxes altogether.
Key Tax Benefits of Opportunity Zones:
- Tax Deferral: Deferred taxes on capital gains invested in a QOF.
- Tax Exclusion: Exclusion of capital gains on investments held for 10+ years.
- Reduced Taxes on Gains: Reduction in taxes owed on capital gains if the investment is held for a certain period.
This makes Opportunity Zones an attractive option for taxpayers looking to minimize their tax liabilities while simultaneously contributing to the revitalization of underserved areas. Opportunity zones are a federal level program, so be sure to check out your state level capital gains situation and see if there are state level credits and incentives you can tax advantage of.
Federal Capital Gains Tax Rates
At the federal level, capital gains tax rates are determined based on the holding period of an asset and the taxpayer’s income bracket. Capital gains can be classified into short-term (for assets held for less than one year) or long-term(for assets held for more than one year) gains. Long-term capital gains benefit from more favorable tax rates compared to short-term gains, which are taxed at ordinary income tax rates.
Capital Gains Tax Rates Overview
The following table shows the long-term capital gains tax rates based on income brackets for the 2025 tax year:
| Filing Status | 0% Rate | 15% Rate | 20% Rate |
|---|---|---|---|
| Single | Up to $44,625 | $44,626 – $492,300 | Over $492,300 |
| Married (Joint) | Up to $89,250 | $89,251 – $492,300 | Over $492,300 |
| Head of Household | Up to $59,750 | $59,751 – $492,300 | Over $492,300 |
For short-term capital gains, the tax rate is aligned with your ordinary income tax rate. Below is a quick look at the ordinary income tax brackets for 2025:
| Tax Bracket | Tax Rate |
|---|---|
| $0 – $11,000 | 10% |
| $11,001 – $44,725 | 12% |
| $44,726 – $95,375 | 22% |
| $95,376 – $182,100 | 24% |
| $182,101 – $231,250 | 32% |
| $231,251 – $578,100 | 35% |
| Over $578,100 | 37% |
How Individuals Are Taxed on Capital Gains
Individuals are taxed on capital gains based on whether the gain is short-term or long-term. As mentioned, long-term capital gains (for assets held longer than one year) are taxed at preferential rates. This makes holding investments for longer periods more tax-efficient.
How Opportunity Zones Impact Taxation
When a taxpayer invests in a Qualified Opportunity Fund (QOF), the capital gains realized from the sale of other investments can be deferred, potentially reducing their overall tax burden. For example, if you sell stocks or real estate and realize a capital gain, you can reinvest that gain into a QOF and defer the capital gains tax. Additionally, if the QOF is held for at least 10 years, any further appreciation in the QOF investment can be excluded from capital gains tax entirely.
This makes Opportunity Zones an excellent tool for individuals seeking to minimize their capital gains tax while also contributing to economic development in underdeveloped regions.
Capital Gains Tax Planning Strategies
High-net-worth individuals and business owners often seek ways to minimize their capital gains tax obligations. There are two primary methods to achieve this: Opportunity Zones and Renewable Energy Tax Credits. Both of these strategies can be used in tandem to significantly reduce tax liabilities.
Opportunity Zones as a Tax Planning Tool
Investing in Opportunity Zones through a QOF offers one of the most effective ways to reduce capital gains tax obligations. By deferring tax on the initial gains and excluding any appreciation on investments held for 10 years, Opportunity Zones provide a significant tax-saving opportunity. These funds are available for investments in real estate, infrastructure, and businesses in economically distressed communities, making them a compelling option for tax-conscious investors.
Renewable Energy Tax Credits and Tax Equity Deals
Another tax planning strategy involves investing in renewable energy projects. The renewable energy tax credit allows taxpayers to claim a credit for investments made in solar, wind, and other renewable energy projects. Through tax equity deals, investors can monetize these credits, which can then be used to offset their overall tax liabilities.
Both Opportunity Zones and renewable energy tax credits can be combined to create an even more effective tax strategy. For example, an investor could use capital gains from an asset sale to invest in a QOF while also participating in a renewable energy tax equity deal. The tax credits generated from the renewable energy investment can help reduce overall tax exposure, while the Opportunity Zone investment offers deferral and exclusion benefits.
Example Scenarios
Scenario 1: Active Participation in a Renewable Energy Tax Equity Deal
John, a high-net-worth individual, sells a commercial property for a $2 million capital gain. Instead of paying taxes on the gain, he invests the full amount into a Qualified Opportunity Fund, which defers his taxes. Additionally, he participates in a tax equity deal for a solar energy project, claiming renewable energy tax credits that further reduce his tax liability.
Scenario 2: Combining Opportunity Zones with Renewable Energy Tax Credits
Sarah, a business owner, decides to sell a portion of her business, realizing a capital gain of $1.5 million. She uses the capital gain to invest in a QOF, deferring her tax liability. At the same time, she invests in a wind energy project and enters a tax equity deal, claiming renewable energy tax credits. The combination of these two strategies allows Sarah to reduce her tax exposure significantly.
Conclusion
Opportunity Zones provide a powerful tool for taxpayers looking to reduce their capital gains tax obligations while simultaneously contributing to the economic development of distressed communities. By investing in Qualified Opportunity Funds, individuals and business owners can defer taxes, reduce their tax exposure, and, in some cases, even eliminate capital gains taxes altogether. When paired with renewable energy tax credits and tax equity deals, the tax-saving potential is even greater.
It is essential for taxpayers to consult with a professional tax advisor to fully understand how Opportunity Zones and other tax-saving strategies can work together to maximize benefits. For more detailed assistance, you can connect with a tax credit consultant today.
FAQ
1. What are Opportunity Zones?
Opportunity Zones are economically distressed communities where investments in real estate or businesses are eligible for federal tax incentives. This includes tax deferrals and exclusions on capital gains.
2. How do Opportunity Zones help with taxes?
Opportunity Zones allow taxpayers to defer capital gains taxes if the gains are reinvested into a Qualified Opportunity Fund (QOF). Additionally, any gains from QOF investments held for 10 years are eligible for exclusion from capital gains taxes.
3. Can I use Opportunity Zones to reduce my capital gains taxes?
Yes, investing in Opportunity Zones through a QOF can reduce capital gains taxes. This is achieved by deferring the taxes on gains until the investment is sold or until 2026. Also, gains on the QOF investment, after holding it for 10 years, can be excluded.
4. Are Opportunity Zones only for real estate investments?
No, Opportunity Zones can also be used for investments in businesses that operate in these designated areas, not just real estate.
5. How can I combine Opportunity Zones with renewable energy tax credits?
By investing in a renewable energy project, you can claim renewable energy tax credits, which reduce your overall tax liability. This strategy can be combined with investing in Opportunity Zones to maximize tax savings.
For more information on renewable energy tax credits and tax planning strategies, contact a professional tax advisor.
States with No Capital Gains
At the state level there are several states that do not have any capital gains tax. While you still utilize opportunity zones to protect your federal capital gains. Those state are listed here:
Alaska Capital Gains Tax
Florida Capital Gains Tax
Nevada Capital Gains Tax
South Dakota Capital Gains Tax
Texas Capital Gains Tax