About Opportunity Zones

Opportunity Zones are census tracts added to the federal tax code that must meet one of three criteria under the definition of “low-income community” in Internal Revenue Code Section 45D(e). These criteria are defined by both poverty and median family income.

California worked with local governments to ensure that census tracts fit this definition in nominating census tracts of economic distress. The average poverty rate in a California Opportunity Zone is twenty percentage points higher than the statewide average. The median family income of a California Opportunity Zone is half the statewide average.

The Benefits of Opportunity Zones

Opportunity Zones incentivize investment and economic development in distressed communities by providing federal tax benefits to investors for qualified uses. The incentive enables a temporary deferral on capital gains for qualified investments through a Qualified Opportunity Fund (QOF) established with the Internal Revenue Service (IRS).

Investors can defer federal capital gains taxes on the invested gain amounts until there is an event that reduces or terminates the qualifying investment in the QOF, or December 31, 2026, whichever is earlier. In addition, if the investor holds the investment in the QOF for at least 10 years, the investor is not required to pay federal capital gains taxes on any realized gains from the investment. All QOFs must hold at least 90 percent of assets in qualifying Opportunity Zone properties or businesses.

Types of Investments

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QOFs can invest in properties or business properties. To ensure that investments contribute to community revitalization, federal legislation requires certain property improvement thresholds.

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Operating Business

QOFs can invest in businesses to catalyze new economic activity in underinvested areas. The recipient business must meet certain criteria, such as requirements for the percentage of revenue generated and percentage of tangible property located in OZs.

Additional Resources

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The U.S. Department of Housing and Urban Development (HUD) manages the federal OZ website which provides tips, resources, and examples of best practices to assist local leaders.
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The Internal Revenue Service (IRS) hosts a webpage that includes uniform guidance and regulations for Qualified Opportunity Funds (QOFs) and qualified Opportunity Zone investments.

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California Community & Place-Based Solutions
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Produced in Partnership with the U.S. Economic Development Administration