Opportunity Zone Programs Explained
Opportunity Zone Advantages
DEFERRAL OF CAPITAL GAINS
Eligible capital gains can be invested into an Opportunity Fund. By investing in an Opportunity Fund, the invested capital gains tax is not due until 2026
REDUCTION OF CAPITAL GAINS
After holding an investment in the Opportunity Zone Fund until 2026 the Capital Gains tax on the original Capital Gains is reduced by 10%. This is the equivalent of having a 10% step-up in basis on the initial investment
NO CAPITAL GAINS TAX ON FUND PROFITS
After holding an investment in the Opportunity Fund for at least ten years, an investor’s disposition of an investment in the Opportunity Fund does not result in any additional federal income taxes.
Illustrative Investment Timeline
$1 M Investment / Ten-Year Hold
Taxpayer generates a capital gain of $1M and is eligible for tax benefits if the gain is reinvested into an OZ-Fund within 180 days.
year 6 tax reduction
Deferred capital gains tax reduced by 10%. $238k tax liability is reduced to $214k.
disposition + ELIMINATION
Taxpayer’s $1M OZ-Fund investment has appreciated 7% annually since 2020 and is sold for $2M. Since the asset has been held for 10 years, taxes on the $1M of OZ-Fund capital gains are eliminated, generating significantly higher after-tax profits than a similar investment that is exposed to capital gains taxation.
investment + deferral
Taxpayer invests the $1M gain into a qualified OZ Fund and defers paying the $238k of tax liability until the earlier of (i) the investment sale date, or (ii)December 31, 2026.
tax recognition date
If the asset has not yet been sold, taxpayer must pay the $214K deferred capital gain tax liability.
(1) Assumes long-term capital gains tax of 23.8% (Federal capital gains tax of 20% and net investment income tax of 3.8%), no state income tax and annual appreciation of 7% for the Opportunity Fund Investment.
The above example is for informational purposes only. You should not construe any such information or other material as legal, tax, investment, financial, or other advice. Return comparison calculations are based on a hypothetical situation in which an individual has invested $1,000,000 of eligible capital gains. The return comparison ignores the impact of income tax. Your individual results may vary depending on your individual circumstances.