Qualified Opportunity Zones (QOZs) come up often in financial planning conversations, particularly for clients who have a strong need to mitigate capital gains tax issues. A QOZ is a classic example of one investing tool which delivers the most value as one component of a multifaceted strategy.

CFP Certified Financial PlannerA QOZ has four main benefits:

  1. Defer the gain until 2026 tax year.
  2. No capital gains taxes on the new investment if you hold it for 10 years.
  3. You can still accelerate the depreciation on your new purchase, and no recapture on this after the 10-year holding period.
  4. You can invest in real estate and buy and start new businesses in a QOZ.

Let us run through a brief example and break down some of the fundamental challenges with this strategy.

Scenario: Real Estate Sale

Not too long ago, I was working with two investors who were planning to sell a substantial amount of real property. Both investors were concerned with taxes; however, their primary concern was being able to go their own way after the sale. If they were to utilize a 1031 exchange, they would be unable to go their separate ways. This particular case was not ideal because the sale was moving forward quickly and we didn’t have much lead time.

Our only option was executing a 1031 exchange; however, we would have to transfer the proceeds after the sale. We determined the best path forward was to move funds first into a 1031 exchange, and then, following the sale, we would transfer some of the funds into a deferred sales trust (DST) to allow the partners to invest without the restrictions of the 1031 exchange.

The remaining funds would then be invested into the client’s own Opportunity Zone Fund. There are various situations where it is advantageous to combine vehicles similarly if you understand the tax benefits, the opportunities, the constraints, and the specific way the transaction needs to be executed.

Want to discuss if a Qualified Opportunity Zone fund is right for you? Book a consultation today.



This material was created for educational and informational purposes only and is not intended as tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.




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