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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

 

Consideration1031 ExchangeOpportunity Zone
 
Like-kind property Property TypeRequired
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
personal property
Deferral of capital gains

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
None

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 all-encompassing list of comparisons. An investor should review all potential benefits and risks of 1031 Exchanges and Opportunity Zones before making an investment a quick chart that illustrates the differences of an Opportunity Zone and 1031 Like Kind Exchange. 

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