Opportunity Zones and Opportunity Funds Under the New Tax Law

If you sold a business, real estate, or stock at a gain in recent years, you already know the capital gains tax bill can be jarring even though capital gains rates are arguably in many cases at all-time lows.

Opportunity Zones — created by the Tax Cuts and Jobs Act of 2017 — offer a federally authorized path to defer that gain, and in some cases reduce or eliminate it entirely, by putting that capital to work in designated communities that need investment. Indiana has dozens of designated zones, including several in the Fort Wayne and Allen County area.

Here is a plain-English breakdown of how the program works, what the rules require, and what NE Indiana business owners and investors should know before they commit capital.

What Is an Opportunity Zone, and How Did the Program Start?

An Opportunity Zone is a census tract designated by the U.S. Treasury as an economically distressed community where new investment may qualify for preferential tax treatment. The program was established under the Tax Cuts and Jobs Act (TCJA) of 2017 and nearly every state — including Indiana — nominated tracts that were then certified by the Treasury. There are roughly 8,700 designated Opportunity Zones across the country.

Indiana's Opportunity Zones were nominated by the Governor and certified by the U.S. Treasury in 2018. Several zones fall within Allen County, making this program directly relevant to Fort Wayne-area investors and developers who want to put capital gains to work locally rather than shipping them to a coastal market.

How Does an Opportunity Fund Work?

A Qualified Opportunity Fund (QOF) is the investment vehicle through which taxpayers access Opportunity Zone benefits. A QOF must hold at least 90% of its assets in Qualified Opportunity Zone Property, and the investor must roll eligible capital gain proceeds into the fund within 180 days of the triggering sale.

Here is how the mechanics unfold:

• Step 1 – Trigger a gain. You sell stock, real estate, a business, or another capital asset at a profit.

• Step 2 – Invest in a QOF within 180 days. Only the gain amount — not the full sale proceeds — needs to be reinvested to get the deferral benefit.

• Step 3 – Defer the original gain. The gain is not recognized until the earlier of (a) the date you sell or exchange your QOF interest, or (b) December 31, 2026 under current law.

• Step 4 – Potential exclusion on QOF appreciation. If you hold your QOF investment for at least 10 years, any appreciation on the fund itself can be excluded from federal income tax entirely when you sell.

A QOF can be set up as a corporation or partnership, which means a Fort Wayne entrepreneur could, in principle, self-certify their own fund using IRS Form 8996 — though doing so without professional guidance is not advisable given the compliance requirements.

What Tax Benefits Can Opportunity Zone Investors Actually Expect?

The benefits are real but come in layers — and the exact outcome depends on your holding period and when the deferred gain is ultimately recognized. Three distinct tax advantages are available under the program.

1. Deferral. The original capital gain is deferred — you don't pay tax on it when you invest in the QOF. You pay when you exit the fund or on December 31, 2026, whichever comes first.

2. Potential step-up in basis. Earlier law allowed a partial step-up in basis (10% after 5 years, 15% after 7 years) on the original deferred gain, but those holding-period thresholds have passed as of 2023 for investments made after 2019. Check with your tax advisor at Warrior on how this applies to your specific situation, especially for earlier-vintage investments.

3. Exclusion of QOF appreciation. This is the headline benefit: hold the QOF interest for 10 years and elect to have your basis in the fund stepped up to fair market value at sale — meaning all appreciation earned inside the fund is tax-free at the federal level.

Indiana generally conforms to federal tax law for capital gains treatment, but you should verify current Indiana DOR guidance, as state conformity can lag or differ on specific provisions. This is one reason proactive tax planning well before a liquidity event is so valuable.

What Qualifies as Opportunity Zone Property Inside a Fund?

Not every investment made inside a zone automatically qualifies. The IRS sets specific standards for what counts as Qualified Opportunity Zone Property, and the rules differ between business equity investments and tangible property.

For tangible property — think real estate or equipment — to qualify, it must be:

• Used in a trade or business inside the Opportunity Zone;

• Acquired by purchase after December 31, 2017; and

• Either original-use property or substantially improved (the fund must roughly double the adjusted basis of the property within 30 months).

For business equity investments, the business must be a Qualified Opportunity Zone Business — meaning it derives at least 50% of its gross income from active conduct of a trade or business within a zone, among other tests. Certain "sin businesses" (golf courses, country clubs, liquor stores, massage parlors, and similar) are excluded by statute.

The 90% asset test for the QOF itself is measured semi-annually, so ongoing compliance tracking matters. If you're running your own fund alongside a manufacturing or construction business in NE Indiana, our team has experience with the manufacturing and construction and trades industries and can help you structure things correctly from the start.

What Are the Biggest Risks and Compliance Pitfalls?

Opportunity Zone investments are not a guaranteed tax windfall — they carry real financial, regulatory, and market risk that every investor should weigh carefully before committing capital.

• Illiquidity. To get the 10-year appreciation exclusion, you must hold your QOF interest for a decade. That is long-term capital commitment with limited ability to exit early without losing the benefit.

• Deferred gain is still due. The original capital gain does not disappear — it gets deferred to December 31, 2026 at the latest under current law. You'll owe tax on it at whatever the capital gains rate is at that time.

• 90% asset test failures. If a QOF fails to meet the 90% test, a monthly penalty applies under IRC §1400Z-2.

• Underlying investment risk. A tax benefit means nothing if the underlying real estate project or business fails. Vet the economics independently of the tax angle.

• Form 8997 reporting. Investors must file IRS Form 8997 annually to track their QOF investments and deferred gains. Missed filings create IRS exposure — something our tax planning team monitors for clients year-round.

How Do Indiana Business Owners Get Started?

Getting started requires identifying a qualifying zone, locating or structuring a QOF, and acting within the 180-day window after your triggering gain event. For Fort Wayne and Allen County investors, the first practical step is confirming whether a target property or business falls within a designated zone using the CDFI Fund's Opportunity Zone mapping tool.

After that, the structure of your investment matters enormously. Self-certifying a QOF via Form 8996 is technically accessible to any LLC or corporation, but the ongoing compliance burden — 90% asset tests, substantial improvement timelines, active business income tests — means you should have a CPA/EA and attorney at your side before you sign anything. Reach out to your accountant and advisor at Warrior Business Services to model the after-tax outcomes against simply paying the capital gains tax now or using a different deferral strategy like a 1031 exchange.

The Opportunity Zone program is one of the more genuinely useful tax planning tools to come out of the TCJA, but it rewards investors who plan carefully and penalizes those who move fast without understanding the rules. Start the conversation early — ideally before the sale closes.

Sources

1. Tax Cuts and Jobs Act of 2017, Pub. L. 115-97. U.S. Congress. 2017. https://www.congress.gov/bill/115th-congress/house-bill/1/text

2. Opportunity Zones Resources. U.S. Department of the Treasury, Community Development Financial Institutions Fund. https://www.cdfifund.gov/opportunity-zones

3. IRC §1400Z-1 and §1400Z-2 — Opportunity Zones. Internal Revenue Service. https://www.irs.gov/credits-deductions/businesses/opportunity-zones

4. Indiana Income Tax Conformity. Indiana Department of Revenue. https://www.in.gov/dor/individual-income-taxes/filing-my-taxes/indiana-deductions-from-income/