To start, you must have some type of capital gain!  You can not defer normal income or wages.  The capital gain can be short term or long term.

Second - without getting into the legal weeds, you will need to either invest into an existing fund OR create your own OZ fund, which must be structured as a tax partnership.

Key Date: 180 days from the gain recognition!  You must find your investment in 6 months.  However - we have a unique strategy to start off:

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  • The 6 month date can be 6 months from the due date of a tax return IF the gain is coming from an S Corp, 1041 Trust or Partnership!  In other words, you can use the due date of the business tax return w/ the capital gain PLUS 180 as your investment date!  See for yourself here.

1. Deferral of Capital Gains Tax until April of 2027

• What It Is: Investors can defer tax on any prior gains invested in a Qualified Opportunity Fund (QOF) until the date on which the investment is sold or exchanged, or until December 31, 2026, whichever comes first.
• Example: If you have a $100,000 capital gain from selling stocks, and you invest that gain in a QOF, you won't pay capital gains tax on that $100,000 until you sell the QOF investment or until December 31, 2026 (which is due in April 2027)
  • Many syndicators will attempt to use a refinance strategy to get cash out of the deal and help you pay  your tax

2. Reduction of Capital Gains Tax

• This has since expired

3. Exclusion of Future Gains!

• What It Is: If the investment in the QOF is held for at least 10 years, gains accrued on that investment while in the fund can be excluded from capital gains tax.
• Example: If you invest $100,000 in a QOF and it grows to $600,000 over 10 years, you can sell the investment and pay no capital gains tax on the $50,000 gain.

4. No Depreciation Recapture & Depreciation Benefits Along the Way:

• Depreciation becomes a permanent benefit in OZ structures!  
  • If you are a Real Estate Professional, you can use the losses on your K1s against other income
• If you are not, these losses will carryforward and here is the best part:
  • They become NET OPERATING LOSSES upon disposition!  NOLs can offset ANY income (compared to a passive activity loss)
• In either case, you will never "recapture" depreciation!

1. Real Estate Investments

Types:

• Development Projects: New construction or substantial rehabilitation of commercial, residential, or mixed-use properties.
• Existing Property Upgrades: Renovation or improvement of existing structures.

Rules:

• Substantial Improvement: For an existing property to qualify, the amount of capital improvements must exceed the initial purchase price of the property (excluding the cost of the land).
• Holding Period: The investment must be held for at least 10 years to qualify for the full exclusion of future gains.

Types:

• New Businesses: Investing in startups or expanding businesses within Opportunity Zones. 
  • For example, your friend has a startup that needs seed capital.  If your OZ Fund chooses to invest in them AND the underlying business qualifies, this could be a great strategy for both of you. 
• Existing Businesses: Investments in businesses already operating within the Opportunity Zones but aiming for further growth.

Rules:

• Business Qualification: At least 50% of the business's income must be derived from the active conduct of business within the Opportunity Zone.
• Property Usage: A substantial portion of the business's tangible property must be used within the Opportunity Zone (think assets and inventory, which can be a challenge).
• Investment Timeline: As with real estate, a 10-year holding period is typically required for the full exclusion of future gains.

1. "Net Capital Gains"- did you know almost anyone that participates in the stock market can utilize this strategy?
   1. If you have $10,000 of capital gains and $12,000 of capital losses on a brokerage statement
   2. You can elect to defer the $10k and harvest the $12k of losses
1. Savvy family offices are using this strategy to create 10 year homeruns for their wealthy investors...
   
   
   1. Cost Seg & Hold - savvy syndicators or fund investors will realize you can complete your Cost Seg in 2023 (so long as the property is placed in service) and hold onto claiming the accelerated depreciation losses until April of 2027. This is nuanced, but a timing game that is certainly possible. 
   2. Creation of your own Fund (complex and more expensive) - 
   3. You & another entity (or trust) set up the XYZ Family Fund.  Why? The rules state the OZ Fund MUST be a partnership structure.  However, we can game this by simply creating a 99/1 partnership "with yourself" via an irrevocable trust. 
   4. You would then seed the Fund with your gain and any gains from others (if you want)
   5. You can satisfy the 180 day rule with this investment (with caveats) while looking for the OZ
2. You can then: 
   
   
   • Start your own OZ project/business
   • Spread the funds around to other funds or OZ properties in existence
     • For example, you could spread your Cap Gain into 10 funds or projects.
3. 4.  Doubling up Strategies to Multiply Tax Benefits
   1. 
      
      1. Crypto Mining in OZ
         1. Minimal headcount needed, so you can easily locate 50% of the business wages in the OZ and all of the capital in the OZ
         2. Adding solar on the mining operation in an OZ will produce even greater benefits!
      2. Solar Farm Business in OZ
         1. Tax credits, depreciation and a tax free sale
            
            

As always, the underlying OZ investment must be sound, before tax benefits!  

If you are interested in talking more or exploring how this could work for you, reach out to your Project Manager on Soraban!