Potential Tax Benefits
An individual who invests in a QOZ is eligible for favorable tax treatment in the form of both deferral and forgiveness. Taxable gains from the sale or exchange of virtually any type of property may potentially defer gains by reinvesting the proceeds in a QOF within 180 days of the sale or exchange.
- Defer taxable income from gain until December 31, 20261
- 10+ year hold on QOF allows for complete tax elimination
QOZs & QOFs Explained
The Qualified Opportunity Zone (QOZ) program was created to revitalize economically distressed communities using private investments rather than taxpayer dollars. Defined under the 2017 Tax Cuts and Jobs Act, QOZs are census tracts (permanent statistical subdivisions of a county) composed of economically disadvantaged communities, including a small percentage of tracts contiguous to low-income census tracts. There are currently more than 8,700 QOZs identified throughout the United States.
A Qualified Opportunity Fund (QOF) is an investment vehicle typically structured as a partnership or corporation and is responsible for investing in QOZ property or properties. QOFs are required to hold at least 90% of their assets in QOZ businesses and assets and are required to meet additional standards.
QOZ After-Tax Hypothetical Example
This hypothetical real estate property sale compares the potential tax implications of a QOZ vs non-QOZ investment.1,2,3
- $1,000,000 investment over a 10-year hold
- Assuming hypothetical 8% compounded rate of return on both investments
- Investors may pay $0 in capital gains on next decade of returns
1 Illustration assumes investor is subject to top marginal U.S. federal income tax rate of 20% on long-term capital gains for individuals, net investment income tax of 3.8% and state tax of 6.2% for a total tax liability of 30%. This illustration assumes that no brokerage or investment advisory fees are accounted for with respect to Non-Qualified Opportunity Fund example and assumes that no fees are due to the asset manager and its affiliates and no sales commissions, deal fees or placement agent fees are accounted for with respect to Qualified Opportunity Fund example. This communication is not intended as tax advice, and investors should consult with their own tax advisors regarding an investment in a Qualified Opportunity Fund.
2 Illustration assumes that Qualified Opportunity Zone investor is a resident of a state that conforms with QOZ Program.
3 Example assumes investor does not pass away during 10-year period. If investor were to pass away, heirs receive a step-up in basis in Non-Qualified Opportunity Fund example and a carryover basis for Qualified Opportunity Fund example.
4 Assumes that investor has no capital losses to reduce such capital gain and refers to inclusion of the original, invested capital gains in such investor’s taxable income on December 31, 2026.
