Have Partnership Gains?

Venture capital, private equity, and hedge fund principals can strategically leverage Opportunity Zone (OZ) investing to defer and potentially reduce capital gains realized from their carried interest or other partnership gains. Under current IRS rules, capital gains recognized through K-1 distributions – whether from the sale of portfolio companies, fund assets, or secondary interests – are eligible for OZ reinvestment if deployed within 180 days of recognition.

By rolling those gains into a Qualified Opportunity Fund (QOF), principals may defer federal taxes until 2026 and eliminate capital gains on the new OZ investment if held for 10 years. This creates a compelling tax-advantaged strategy for managing liquidity events while reallocating into real assets with long-term growth potential.

About the Opportunity Zone Program

Qualified Opportunity Zones (OZ) were created as part of the Tax Cuts and Jobs Act of 2017. These zones were designed to spur economic development and job creation in communities throughout the country by providing tax benefits to investors with eligible capital gains. The OZ program incentivizes long-term investment to revitalize underserved, often underdeveloped communities across the U.S.

Investors have 180 days from the day the capital gains event occurs to invest into a Qualified Opportunity Zone Fund.

OZ Tax Benefits*

1. Defer Original Capital Gains Tax
Upon investment into a QOF, the tax liabilities of eligible capital gains can be deferred until the investor’s 2026 tax return, payable April 15, 2027. Importantly, investors are not required to invest the entire capital gain, they can invest all or only a portion.

2. Eliminate Taxes on OZ Investment Gains
If the investor holds the QOF investment for at least 10 years, they can exclude capital gains tax liabilities on any new gains realized from that investment.

3. No Depreciation Recapture
With OZ investments, depreciation can be used to offset ordinary income tax liabilities like traditional real estate investments. However, OZ investments are not subject to recapture tax at the terminal sale.

*These tax benefits are associated with the current OZ program (OZ 1.0), effective through 12/31/2026.