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Opportunity Zones
TAX-DEFERRED GAINS
Opportunity Zones (OZ) are a new community development program established by congress in the Tax Cuts and Jobs Act of 2017 to encourage long-term investments in low-income urban and rural communities nationwide. You have 180 days from the sale of your assets (realized gain) to invest into a qualified Opportunity Zone Fund resulting in a triple-threat tax treatment that includes capital gains tax elimination, realized capital gains tax deferral and a tax basis step up to 15%.
Opportunity Zone Investment Tax Potential Benefits
THE INVESTED GAIN
Upon investment of capital gain into an Opportunity Fund, the invested gain is deferred from inclusion in your gross income until the sale of the Opportunity Fund investment or December 31, 2026.
THE DEFERRAL PERIOD
When the deferral period expires, if the Opportunity Fund investment was held for five or more years, the gain included in gross income is reduced by 10%. If the investment was held for more than seven years, the gain included in gross income is reduced by 15%.
PERMANENT EXEMPTION
When you eventually exit the Opportunity Fund, if the Opportunity Fund investment was held for 10+ years, you are permanently exempt from paying capital gains tax on gain realized from the sale of the Opportunity Fund investment.
HYPOTHETICAL EXAMPLE
You Have Sold $2 Million of Google Stock With $1 Million Capital Gain, Now You Can:
- Invest $1 million into an Opportunity Zone Fund
- Income potential property ownership free of day-to-day landlord and management issues
- After the fifth year your basis is reduced by 10% to $900,000
- After the seventh year your basis is reduced another 5% to $850,000, so now you only owe capital gains on $850,000 not $1 million; capital gains are required to be paid in year 2026
- Investment grows from $1 million to $3 million and you owe no taxes on the $2 million gain from the OZ Fund investment if you hold the investment for 10+ years
1031 Exchange Versus Opportunity Zone
| Consideration | 1031 Exchange | Opportunity Zone |
|---|---|---|
| Like-kind property Property Type | Required Must be real, tangible property |
Not Required Can be real or personal property or unimproved land as long as a plan exists to improve it in an opportunity zone |
| Time required to find replacement property |
Required 45 Day Id/ 180 Day Close |
6 months |
|
Amount invested Partnership interests, stock or |
Principal and capital gains from sale Not allowed Upon sale unless further deffered in another like-kind exchange |
Capital gains (or partial capital gains) from any qualified investment sale Allowed December 31, 2026, or upon sale of property |
| Income tax basis step up for holding property for five or seven years Sale to related parties Improvement or use required |
None With a two-year holding period |
If 5 years before Dec 31, 2026, 10%; If 7 years before Dec 31, 2026, 15% Not Eligible Substantial improvement required |
The list above is not an all-encompassing list of comparisons. An investor should review all potential benefits and risks of 1031 Exchanges and Opportunity Zones before making an investment decision. The chart above is for general informational purposes only which illustrates the differences of an Opportunity Zone and 1031 Like Kind Exchange.