Opportunity Zone Funds: An Underutilized Strategy for Capital Gains Tax Deferral in Volatile Markets

19. Oct 2025

Last Updated: October 2025

Reading Time: 12 minutes

Executive Summary

Opportunity Zone funds represent one of the most powerful tax-advantaged investment strategies available to investors facing capital gains taxes in today’s volatile market environment. Investing in Opportunity Zone funds creates a powerful arbitrage opportunity: selling high in an overheated market and buying low in undervalued areas, all while deferring and reducing tax liability. With the passage of the One Big Beautiful Bill Act in July 2025, this program has been made permanent and enhanced, offering investors the ability to defer capital gains taxes, receive basis step-ups, and potentially eliminate all taxes on future appreciation. This comprehensive guide explains how these funds work, their recent enhancements, and why they deserve consideration as part of your tax planning strategy.

What Are Opportunity Zone Funds?

Opportunity Zone funds, formally known as Qualified Opportunity Funds (sometimes referenced herein as “QOFs”), are specialized investment vehicles created under the Tax Cuts and Jobs Act of 2017 and recently enhanced by the One Big Beautiful Bill Act of 2025. These funds enable investors to defer and potentially eliminate capital gains taxes by reinvesting gains into economically distressed communities designated as Qualified Opportunity Zones.

The program was designed to channel private capital into underserved areas across all 50 states, U.S. territories, and Washington, D.C., while providing substantial tax benefits to investors. As of 2025, the program has attracted over $120 billion in investment and created more than 313,000 new housing units in previously stagnant markets.

How Do Opportunity Zone Funds Work?

The Basic Structure

A Qualified Opportunity Fund operates as either a partnership (under US tax law) or corporation that invests at least 90% of its assets in Qualified Opportunity Zone property. These assets can include real estate, operating businesses, or other qualifying assets located within designated Opportunity Zones.

Investors can contribute capital gains from virtually any source—stocks, cryptocurrency, real estate, business sales, or other appreciated assets—into a QOF within 180 days of realizing the gain. This contribution triggers the tax deferral and starts the clock on additional tax benefits based on holding periods.

Key Investment Requirements

Critical clarification: Unlike 1031 exchanges, which require investors to reinvest the full proceeds from a property sale, Opportunity Zone investments only require the capital gains portion to be invested. This is a significant advantage that many investors overlook.

For example, if you sell some of your Bitcoin for $2 million with an original cost basis of $800,000, you only need to invest the $1.2 million gain into a QOF to qualify for all tax benefits. The remaining $800,000 representing your original investment can be used for any purpose, providing crucial liquidity and flexibility.

The Three-Tier Tax Benefits of Opportunity Zones

Benefit #1: Capital Gains Tax Deferral

When you invest eligible capital gains into a QOF, you can defer paying federal taxes on those gains. Under the enhanced program, gains invested after December 31, 2026, receive a rolling five-year deferral period. For investments made before that date under the original program, the deferral extends until December 31, 2026, or until the investment is sold, whichever comes first.

Translation: if you sell today and investment in a QOF prior to year-end 2026, you can only defer paying the tax on this capital gain through tax years 2025 and 2026 and there is no step-up in basis because it falls short of the 5-year minimum holding period under the old regime under the TCJA (unless you rollover this investment into another QOF on or after January 1, 2027). If you wait to sell and invest in a QOF on January 1, 2027, or later, you can defer paying capital gains tax for 5 years.

Benefit #2: Basis Step-Up on Deferred Gains

The One Big Beautiful Bill Act simplified and enhanced the basis step-up provisions. Under the new framework:

Standard QOF investments: Investors receive a 10% basis step-up after holding the investment for five years, reducing the tax owed on the original deferred gain
- For example, if (a) you invested $100,000 into a condo apartment, (b) you sell it for $500,000 in 2027, and (c) you invest the $400,000 profit (capital gains) in a standard QOF, your cost basis in the QOF will jump to $440,00 (and thus reduce your implied capital gains tax liability) if you stay invested in the QOF for 5 years.
Qualified Rural Opportunity Funds (QROFs): For investments in rural Opportunity Zones, investors receive an enhanced 30% basis step-up after five years, providing significantly greater tax savings.
- Using the above hypothetical scenario, if the investment was made in a QROF, your basis in the QROF would jump to $520,000, ensuring tax free profit of $120,000 (assuming you can sell your stake in the QROF at $520,000 or more).

This represents a major improvement over the previous structure, which required seven years to achieve a 15% step-up.

Benefit #3: Complete Capital Gains Tax Elimination

The most powerful benefit remains unchanged: investors who hold their QOF investment for at least 10 years can permanently exclude all post-acquisition capital gains from federal taxation. This means any appreciation in the Opportunity Zone investment is never taxed, regardless of amount.

For example, if you invest $500,000 in capital gains into a QOF and the investment grows to $1.5 million over 10 years, the entire $1 million in appreciation is permanently tax-free.

What Changed Under the One Big Beautiful Bill Act?

Making the Opportunity Zone Program Permanent

The most significant change is permanence. The original Opportunity Zone program was scheduled to sunset at the end of 2026. The One Big Beautiful Bill Act eliminates this expiration date, providing long-term certainty for investors and developers. This permanence enables institutional investors and real estate developers to commit to longer-term projects without worrying about program expiration.

New Rural Opportunity Zone Enhancements

Recognizing that rural communities faced greater challenges attracting investment, the Act established Qualified Rural Opportunity Funds with enhanced incentives:

Enhanced basis step-up: 30% basis step-up at year five (compared to 10% for standard QOFs)
Reduced substantial improvement requirement: Rural properties only need to be improved by 50% of the original basis (excluding land), compared to 100% for non-rural properties
Broader rural definition: Any city or town with a population under 50,000, excluding census tracts adjacent to cities over 50,000 people

Redesignation and Updated Eligibility

Beginning July 1, 2026, governors will nominate new Opportunity Zones through a redesignation process that will occur every 10 years. The new eligibility criteria are more stringent, requiring census tracts to meet one of these thresholds:

Poverty rate of at least 20%, or
Median family income that does not exceed 70% of area median income
Median family income not exceeding 125% of the state or metropolitan median (depending on rural vs. urban classification)

At least 33% of new designations must be in rural areas, ensuring geographic diversity in program benefits.

Enhanced Transparency and Reporting

The Act introduces new reporting requirements for QOFs and Qualified Opportunity Zone Businesses (QOZBs), including disclosure of total assets, investment amounts, and data on employment and housing impacts. These requirements aim to increase accountability and allow policymakers to better assess the program’s effectiveness.

Why Opportunity Zones Make Sense in Today’s Market Environment

Navigating Market Volatility

In periods of market uncertainty or when assets appear overbought, many sophisticated investors face a common dilemma: they want to capture gains and reduce portfolio risk, but selling triggers substantial capital gains tax liability. This tax drag can consume 20-37% of long-term capital gains, depending on federal rates, net investment income tax, and state taxes.

Opportunity Zone funds provide a strategic solution. Instead of paying immediate taxes on realized gains, investors can:

Lock in gains from frothy or overvalued positions
Defer the tax liability from December 31, 2026 to five years (for new investments made on or after January 1, 2027)
Redeploy the full gain amount (that would otherwise go to taxes) into potentially undervalued Opportunity Zone assets
Benefit from a basis step-up that reduces the deferred tax
Eliminate all future appreciation taxes after 10 years

This creates a powerful arbitrage opportunity: selling high in an overheated market and buying low in undervalued areas, all while deferring and reducing tax liability.

The Undervalued Asset Advantage

Opportunity Zones are, by definition, designated in economically distressed areas. This means properties and businesses in these zones often trade at discounts to comparable assets in more affluent areas. For investors with a 10-year horizon, this creates an opportunity to:

Acquire assets with greater upside potential;
Benefit from economic development and community improvement;
Capture appreciation as the zone receives investment and improves; and
Achieve tax-free returns on that appreciation

How Are Opportunity Zone Funds Created and Managed?

Fund Formation and Self-Certification

Creating a Qualified Opportunity Fund is surprisingly straightforward. Any partnership or corporation can self-certify as a QOF by filing IRS Form 8996. The entity must be organized for the specific purpose of investing in Qualified Opportunity Zone property.

The 90% Asset Test

QOFs must maintain at least 90% of their assets in Qualified Opportunity Zone property. This requirement is tested semi-annually. The fund has flexibility in how it meets this threshold:

Direct investment in QOZ real property
Investment in QOZ businesses
Equity interests in partnerships or corporations that operate in QOZs

The Substantial Improvement Rule

For real estate investments, QOFs must “substantially improve” acquired property. This means investing an amount equal to the adjusted basis of the property (excluding land value) within 30 months of acquisition. Under the enhanced rural provisions, this threshold is reduced to 50% for properties in entirely rural Opportunity Zones.

Alternatively, funds can develop new construction, which automatically satisfies the substantial improvement requirement.

Professional Management Structures

Many investors access Opportunity Zone investments through professionally managed QOFs rather than creating their own. These funds are typically structured with:

Experienced sponsors: Real estate developers or investment firms with expertise in the target markets
Diversified portfolios: Multiple projects across different zones to reduce concentration risk
Professional asset management: Ongoing property management and business operations
Clear exit strategies: Plans for realizing returns after the optimal holding period

Investors become limited partners in these funds, similar to other private equity investments, but with the added tax benefits of the QOZ program.

Investor Benefits: Who Should Consider Opportunity Zone Funds?

Ideal Candidate Profile

Opportunity Zone investments are particularly attractive for investors who:

Face significant capital gains tax liability from recent or anticipated asset sales
Have a long-term investment horizon (minimum 5 years, ideally 10+ years)
Seek tax-advantaged real estate exposure without the constraints of 1031 exchanges
Want portfolio diversification into potentially undervalued markets
Can commit capital within the 180-day reinvestment window
Have other liquidity for near-term cash needs (since QOF investments are typically illiquid)

Key Advantages Over Alternatives

Versus 1031 Exchanges:

Only capital gains need to be invested (not full proceeds)
Any type of capital gain qualifies (not just real estate)
More flexible property types and uses
Clear tax benefits on future appreciation
Simpler timing requirements (180 days vs. 45/180-day structure)

Versus Traditional Real Estate Investment:

Deferral of upfront capital gains tax
Basis step-up reduces ultimate tax on deferred gain
Complete elimination of taxes on appreciation
Access to potentially undervalued markets
Social impact component

Versus Taxable Sales:

Preserve full gain amount for reinvestment
Compound returns on money that would otherwise go to taxes
Potential 10-48% effective tax savings (depending on holding period and jurisdiction)

Important Considerations and Risks

Liquidity Constraints

Opportunity Zone investments are typically long-term and illiquid. Most QOFs are structured as closed-end funds with 10-year hold periods. Investors should only commit capital they won’t need for the duration, and should have sufficient liquidity elsewhere.

Market and Execution Risk

While Opportunity Zones offer tax benefits, they don’t eliminate investment risk. The underlying real estate or business investments must perform. Investors should conduct thorough due diligence on:

The fund sponsor’s track record
Specific properties or businesses in the portfolio
Market fundamentals in the target Opportunity Zones
Development and operational risks
Exit strategy feasibility

Compliance Requirements

Both the fund and investors have ongoing reporting obligations. Investors must file IRS Form 8997 annually to report QOF investments. Funds must file Form 8996 and maintain compliance with the 90% asset test. Working with experienced tax counsel is essential.

The December 31, 2026 Milestone

For investors making investments before the end of 2026, the deferred gain must be recognized by that date or upon sale of the QOF interest, whichever comes first. This creates a planning consideration for the timing of initial investments and the ultimate tax liability on the deferred gain.

Do You Need to Invest 100% of Sale Proceeds or Just Capital Gains?

This is one of the most common questions about Opportunity Zone investments, and the answer provides significant flexibility.

You only need to invest the capital gains portion, not the full sale proceeds.

This represents a major advantage over 1031 exchanges. In a 1031 exchange, investors must typically reinvest all proceeds to completely defer taxes. With Opportunity Zones, you can:

Recover your original basis/investment immediately
Use that basis for any purpose (other investments, living expenses, debt paydown, etc.)
Invest only the gain into the QOF
Still receive all three tiers of tax benefits on the gain amount

Practical Example

Scenario: You sell stock with a $200,000 basis for $1,000,000.

Gross proceeds: $1,000,000
Original basis: $200,000
Capital gain: $800,000

With Opportunity Zone Investment:

Amount you must invest in QOF: $800,000 (the capital gain only)
Amount you can use immediately: $200,000 (your original basis)
Tax benefits: All three tiers apply to the $800,000 investment

Without Opportunity Zone Investment:

Immediate federal tax (20% LTCG + 3.8% NIIT): ~$190,400
Amount after tax available to reinvest: $809,600 (versus the entire $1,000,000 gross proceeds)

The QOF structure allows you to preserve the full $800,000 gain for investment, providing an immediate advantage of the tax amount.

How to Get Started with Opportunity Zone Investing

Step 1: Realize or Anticipate Capital Gains

Identify assets you’re considering selling that would generate taxable capital gains. Calculate the expected gain and tax liability.

Step 2: Consult with Tax and Legal Counsel

Before executing any sale, work with experienced advisors who understand Opportunity Zone regulations. At Burrell Law, P.C., we help clients structure these transactions to maximize tax benefits while ensuring compliance.

Step 3: Execute the Sale

Once you’ve planned your QOZ strategy, proceed with selling the appreciated asset.

Step 4: Identify Qualified Opportunity Funds

Within the 180-day window, research and select appropriate QOFs. Consider:

Fund sponsor reputation and track record
Geographic focus and property types
Fee structures
Historical performance
Alignment with your investment objectives and values

Step 5: Make the Investment

Complete the investment within 180 days of the gain recognition. For direct sales, this is typically the sale date. For passthrough entities, different rules may apply regarding the start of the 180-day period.

Step 6: File Required Forms

Make the deferral election on Form 8949 attached to your federal income tax return for the year of the gain. File Form 8997 annually to report your QOF investment.

Step 7: Monitor and Hold

Work with your advisors to monitor compliance and hold the investment for the appropriate period to maximize tax benefits.

The Bottom Line: Why Opportunity Zones Remain Underutilized

Despite their substantial benefits, Opportunity Zone funds remain underutilized for several reasons:

Complexity: The regulations are detailed and many advisors lack expertise
Misconceptions: Confusion with 1031 exchanges and misunderstanding of the “full proceeds” question
Lack of awareness: Many investors with capital gains don’t know the program exists
Perceived risk: Concerns about investing in “distressed” areas
Illiquidity: Long-term lockup periods don’t suit all investors

However, for investors with the right profile—substantial capital gains, long-term investment horizon, and existing portfolio diversification—Opportunity Zones offer one of the most powerful tax-advantaged investment opportunities in the current tax code.

The One Big Beautiful Bill Act’s enhancements, particularly the program’s permanence and rural incentives, make this an optimal time to explore these investments as part of a comprehensive tax planning strategy.

Frequently Asked Questions

Can I invest retirement account funds in Opportunity Zones?

Technically yes, but IRA or 401(k) funds don’t generate taxable capital gains, so they wouldn’t benefit from the QOZ tax advantages. The program is designed for taxable accounts with realized gains.

What types of capital gains qualify?

Both short-term and long-term capital gains qualify. Eligible gains include those from stocks, bonds, cryptocurrency, business sales, real estate (outside of 1031 exchanges), collectibles, and Section 1231 gains.

Can I invest in an Opportunity Zone in my own community?

Yes, if your community has designated Opportunity Zones. You can verify designations at the U.S. Department of Housing and Urban Development’s Opportunity Zone website.

What happens if I need to sell my QOF investment before 10 years?

You can sell earlier, but you’ll lose some benefits. The 10% basis step-up requires a 5-year hold. The elimination of appreciation taxes requires a 10-year hold. Selling earlier triggers recognition of the deferred gain (minus any applicable basis step-up).

Can I invest in multiple Opportunity Zone funds?

Yes, there are no limits on the number of QOF investments you can make, provided each is made with eligible capital gains within the required timeframe.

Are there minimum investment amounts?

The IRS does not specify minimum investments, but individual QOFs typically set their own minimums. Many professionally managed funds have minimums ranging from $25,000 to $500,000.

Legal Disclaimer

This blog post provides general information about Opportunity Zone investments and should not be construed as legal, tax, or investment advice. The rules governing Qualified Opportunity Funds are complex and subject to change. Every investor’s situation is unique, and the suitability of Opportunity Zone investments depends on individual circumstances, objectives, and risk tolerance.

Before making any investment decision or tax election, you should consult with qualified legal, tax, and financial advisors who can evaluate your specific situation and provide personalized guidance. Past performance of Opportunity Zone investments is not indicative of future results.

About Burrell Law, P.C.

Burrell Law, P.C. provides sophisticated legal counsel to businesses, entrepreneurs, and investors navigating complex transactions and tax planning strategies. Our New York and Washington, D.C. offices serve clients nationwide with formation, financing, M&A, and tax advisory services.

We help clients structure Opportunity Zone investments to maximize tax benefits while ensuring full compliance with IRS regulations.

Need help evaluating whether Opportunity Zone investments are right for your situation?

Contact Burrell Law, P.C. for a consultation:

Website: burrell-law.com
Phone: (347) 620-6398
Email: info@burrell-law.com

Additional Resources

Tags: #OpportunityZones #TaxPlanning #CapitalGainsTax #RealEstateInvesting #QualifiedOpportunityFunds #OneBigBeautifulBillAct #TaxDeferral #InvestmentStrategy #BusinessLaw #TaxLaw

Author: Burrell Law, P.C. Legal Team Publication Date: October 2025 Last Updated: October 19, 2025

For personalized legal advice regarding your specific situation, please contact Burrell Law, P.C. to schedule a consultation with one of our experienced attorneys.

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