There are three possible types of benefits that taxpayers may achieve by reinvesting their capital gains into a qualified Opportunity Zone Fund (OZ Fund):
- The taxpayer will achieve a temporary tax deferral for capital gains reinvested in OZ Funds. The deferred gain will be recognized on the earlier of the date on which the taxpayer’s interest in the OZ Fund is sold or December 31, 2026.
- The taxpayer’s basis in their original investment in increased by 10% of the deferred gain if the investment in the OZ Fund is held by the taxpayer for at least 5 years, and by an additional 5% if it is held for at least 7 years. If fully utilized, this step-up in basis translates into an exclusion of 15% of the original capital gains from taxation.
- The appreciation in value of the taxpayer’s interest in the OZ Fund may be permanently excluded from taxation if the taxpayer holds his interest in the OZ Fund for at least 10 years. The taxpayer’s basis in his OZ Fund interest is increased to its current fair market value at the time of the sale or exchange of that interest. This benefit applies only to the appreciation of the investment in the OZ Fund and not to the original gains.