Hedge Fund/PE/VC Principals

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.

As a fund manager, you already understand the power of compounding and the value of asymmetric upside. But you also know the pain of seeing your carry taxed at ordinary income rates if an exit happens inside three years — a change that’s been quietly eating into post-tax returns since 2017 Tax and Jobs Act.  The same year Opportunity Zone legislation was introduced.  

There’s a better way to keep more of what you’ve earned.

By rolling realized carried interest gains into an Opportunity Zone Fund, you can:

• Defer your tax bill until 2026,
• Reinvest 100% of the gain instead of after-tax proceeds,
• Own real, inflation-hedged assets that generate income and appreciate over time, and
• Eliminate taxes entirely on all new appreciation after a 10-year hold.

The Opportunity Zone structure gives carry earners what traditional fund economics can’t: tax-free compounding on new equity growth — stacking a tax-advantaged, inflation-protected layer of wealth on top of it.

Turn Carried Interest into Tax-Free, Real Asset Ownership

Background:

In 2017, the same tax reform that created Opportunity Zones also changed carried interest rules requiring a 3-year hold for long-term capital gains treatment. Gains realized before that are now taxed as ordinary income, often 40%+.

The Opportunity:

By reinvesting carried interest gains into a Qualified Opportunity Fund (QOF), managers can:

• Defer their tax bill until 2026
• Reinvest the full pre-tax gain (not the after-tax remainder)
• Compound tax-deferred returns for 10+ years
• Eliminate taxes entirely on new appreciation

Why It Matters:

Opportunity Zones give carry earners the rare chance to convert short-term, high-tax gains into long-term, tax-free wealth — all while investing in real assets that hedge inflation and generate income.

In short:

Your carry was designed to reward performance.

The OZ structure rewards patience with tax advantages and diversification

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.