What tax benefits can an eligible investor receive by investing in a Qualified Opportunity Fund?
Federal tax deferral through 2026: A taxpayer may elect to defer the tax on some or all of a recently generated capital gain if, within the 180 days beginning at the date the gain was realized, they reinvest all or a portion of the gain in a QOF fund. Any taxable gain invested in a QOF fund is not recognized for tax purposes until Dec. 31, 2026 (due with the filing of the 2026 return in 2027), or until the taxpayer sells their interest in the fund, whichever occurs first. If the gain deferred through QOZ investment is a long-term gain, the deferred taxes due in 2027 will be at the prevailing 2026 long-term capital gain tax rate. This same logic applies to short-term capital gains realized and then deferred through QOZ investment.
Federally tax-exempt appreciation of the QOZ fund investment: If the taxpayer remains invested in the QOZ fund for at least 10 years, they receive a 100% step-up in the cost basis of their QOZ investment upon selling their QOZ fund interest, and thus zero taxes on the capital appreciation generated by the QOZ fund investment itself.
Keep in mind: The tax on the capital gain that is reinvested into a QOZ fund cannot be deferred indefinitely. All QOZ fund investor’s deferrals extend through Dec. 31, 2026, and become due in 2027. Depreciation recapture is also excluded from U.S. federal income tax. Tax-free depreciation recapture allows taxpayers to generate revenues offset by depreciation during the 10 years the investment is held. Typically, this depreciation reduces tax basis by the equivalent amount and, at the time of a future sale, tax is applied to recapture the depreciation at ordinary income or capital gains rates. Under Opportunity Zone provisions, the depreciation recapture and any appreciation in the asset are not subject to tax.