Can you invest in Opportunity Zones without capital gains?

Yes, you can invest in Opportunity Zones without capital gains, but you will not receive any of the tax advantages of OZ investing.

The Opportunity Zone (OZ) program is designed to provide tax incentives primarily to investors who reinvest capital gains into Qualified Opportunity Funds (QOFs). While you can use non-capital gain dollars or after-tax dollars to invest in a QOF, these dollars are ineligible to receive any of the tax benefits associated with the OZ program.

How Capital Gain Investments Work

Investing in Opportunity Zones without capital gains

The primary tax benefits of Opportunity Zones are available only to investments made with eligible capital gains. These benefits include:

  • Deferral of the original gain until December 31, 2026.
  • Reduction of deferred gain if invested before the end of 2021.
  • Tax-free appreciation on the QOF investment if held for at least 10 years.
  • Elimination of depreciation recapture.

To qualify for these incentives, the investment amount must come from the reinvestment of capital gains realized from the sale of assets, such as stocks, real estate, or a business interest.

What Happens If You Invest Non-Capital Gain Dollars in Opportunity Zones?

If you invest non-capital gain funds into a QOF, you will not receive any special tax treatment. The investment will simply be treated as a regular investment without any deferral or exclusion benefits. However, there are still reasons why someone might choose to invest non-capital gain funds into a QOF:

  • Supporting Community Development: Some investors may be more focused on the social impact rather than the tax incentives.
  • Portfolio Diversification: A QOF investment could align with broader investment strategies, even without the OZ tax benefits.
  • Real Estate Investment: Some QOFs focus on real estate development, and investors may find the underlying projects attractive regardless of the tax treatment.

Summary

While it is technically possible to invest in Opportunity Zones without using capital gains, doing so means forgoing the key tax benefits that make QOF investments attractive. To maximize the advantages, it is essential to reinvest eligible capital gains within the 180-day window. Investors who lack capital gains but still want to support Opportunity Zone projects may still choose to invest, but they should do so with a clear understanding that the OZ tax incentives will not apply.