Opportunity Zone Program Overview

Opportunity Zone Programs Explained

Opportunity Zone Advantages

1

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

2

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

3

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

2020
2026
2030
01 jan
liquidation

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.

30 JUNE
year 6 tax reduction

Deferred capital gains tax reduced by 10%. $238k tax liability is reduced to $214k.

30 JUNE
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.

30 june
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.

31 DEC
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.

Example Hypothetical Opportunity Zone Benefits Model

Purchase & Valuation

Header
Header

Improvements

Cell

$10,000,000

Land

Cell

$10,000,000

OZ Reinvestment

Cell

$10,000,000

Total Project

Cell

$30,000,000

Exit Cap Rate

Cell

5.0%

Yield on Cost

6.0%

$1,800,000

NOI Growth

5.0%

Cell

Capital Structure

Header
Header

Equity

Cell

$10,500,000

Debt

65%

$19,500,000

Amortization Schedule

Cell

30 years

Annual Interest Rate

Cell

5.0%

Annual Debt Service

Cell

($1,268,503)

Typical Taxable Investor

Header
Header

Capital Gains Created

Cell

$1,000,000

Tax on Gains

23.8% tax

($238,000)

Investable Capital

Cell

$762,000

%of Project Equity

Cell

7.26%

Total Pre-Tax Cash Flow

Cell

$3,628,183

Total After-Tax Cash Flow

Cell

$2,904,120

Investor IRR

Cell

12.90%

Opportunity Zone Investor

Header
Header

Capital Gains Created

Cell

$1,000,000

Tax on Gains

0.0% tax

$0

Investable Capital

Cell

$1,000,000

%of Project Equity

Cell

9.52%

Total Pre-Tax Cash Flow

Cell

$4,533,122

Total After-Tax Cash Flow

Cell

$4,533,122

Investor IRR

Cell

18.68%

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. 

“Opportunity Zone investing provides a generational opportunity to compound wealth. Pinnacle Partners is an early first mover in opportunity zones and has been able to close multiple projects and build a strong pipeline of future opportunities."