Tax-Advantaged Investing
Qualified Opportunity Zone
(QOF) Funds
Unlock potentially significant tax incentives by reinvesting realized capital gains into low-income communities designated for long-term economic development.
Program Overview
Highly appreciated assets & capital gains
The Economic Opportunity Zones program was created by the Tax Cuts and Jobs Act (TCJA) in 2017 to stimulate economic growth. Designed to provide compelling incentives to the private sector, it creates an avenues to invest long-term in qualified low-income communities throughout the United States.
The program seeks to tap into a portion of the trillions of dollars of unrealized capital gains, redirecting those funds into structural developments and updates within these designated geographic zones.
Tax Advantages
Deferral & strategic basis adjustment
Taxpayers can roll their realized gains into newly structured Qualified Opportunity Funds in exchange for substantial tax benefits. Investors can defer taxes on the gains from the sale of assets rolled directly into the funds.
Furthermore, depending on how long they maintain their investments in such funds, they may receive an increase to their cost basis, as well as tax-free treatment on additional gains earned directly from the assets invested within the fund.
Fund Structure
Simple mechanics and compliance
Qualified Opportunity Funds can be structured seamlessly as either corporations or partnerships. They will generally need to hold at least 90% of their total assets in Qualified Opportunity Zone Property acquired after December 31, 2017.
To become an eligible taxpayer and self-certify a Qualified Opportunity Fund, no complex upfront approval or action by the IRS is required. Taxpayers merely complete a standardized form and attach it directly to their timely filed federal income tax return for the corresponding taxable year.
QOF vs. 1031 Exchange
Strategic advantages over Section 1031
There are two key advantages to utilizing a QOZ Fund relative to entering into a legacy Section 1031 exchange:
1. QOF investments require less capital to defer tax: To defer tax on a gain, only the amount of the actual gain needs to be rolled into a QOF within 180 days of the sale or exchange. The original principal balance can be kept and used elsewhere. In contrast, a 1031 exchange requires the entire asset value to be reinvested into new property to defer tax completely.
2. Less restrictions on type of gains invested: The QOZ framework places far fewer restrictions on the type of gain eligible for deferral. It only requires that the capital gain stem from a sale or exchange to an unrelated person. Real estate, personal property, intangibles, and virtually any other capital asset qualifies. Conversely, under the TCJA, eligibility for 1031 exchange treatment is restricted solely to gains from real estate property.
Case Study
Example: Reinvesting a property sale
Consider an investor, Ted, who owns a building with a current market value of $8,000,000 and a tax basis of $5,000,000. Selling the building would trigger a taxable gain of $3,000,000.
To fully defer the tax via a QOF, Ted only needs to invest the $3,000,000 gain into a QOZ Fund within 180 days. He faces zero restrictions on what he does with the remaining $5,000,000 principal proceeds. To achieve the same tax deferral using a 1031 exchange, Ted would be forced to roll the entire $8,000,000 into a replacement property while meeting strict 45-day and 180-day limits.
Growth Projection
Capital Gains vs. Standard Interest
This side-by-side projection evaluates growth metrics and illustrates how the asset classes perform when compounding returns against standard savings allocations over a ten-year cycle.
| Year | Capital Gains | Savings Account |
|---|---|---|
| 2019 | $5,000,000 | $5,000,000 |
| 2020 | $5,300,000 | $5,187,300 |
| 2021 | $5,618,000 | $5,381,638 |
| 2022 | $5,955,080 | $5,583,439 |
| 2023 | $6,312,385 | $5,793,154 |
| 2024 | $6,691,128 | $6,011,264 |
| 2025 | $7,092,596 | $6,237,291 |
| 2026 | $7,518,151 | $6,471,800 |
| 2027 | $7,969,241 | $6,715,355 |
| 2028 | $8,447,395 | $6,968,367 |
| 2029 | $8,954,239 | $7,231,128 |
| Tax Paid in 2029 | $1,613,329 | $1,365,729 |
| After-Tax Value | $7,340,909 | $5,865,399 |
Optimize your capital gains exposure.
Opportunity Zones present a significant new opportunity both for asset holders, developers, and business owners. Let's design a customized transition strategy built for you.
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