In June 2019, an individual investor in the highest tax bracket sells 1,000 shares of XYZ stock that the individual purchased in 2013 for $250,000. The sale at $1,250 per share results in a $1 million capital gain. Instead of paying the $238,000 in Federal income tax on this sale, the individual invests $1 million into a QOF within 180 days. The investment in the QOF must be an equity investment. The QOF invests the capital in newly issued preferred stock shares of various operating businesses located in Opportunity Zones. The individual plans to sell the QOF in 2030. The value of this investment in 2030 is $2.5 million. The benefits received by this investor include:
- Investing $1 million instead of paying $238,000 in Federal income tax.
- Paying taxes on $850,000 of gains in 2026 instead of paying $238,000 on $1 million in gains in 2019.
- Owing no additional tax on the $1.5 million in gains on the QOF investment realized in 2030.
To qualify for the investor benefits described above, a QOF must:
- Be organized as a corporation or partnership for the purpose of investing in Qualified Opportunity Zone property, and file IRS Form 8996 with its tax return.
- Hold at least 90% of its assets in Qualified Opportunity Zone property. (Qualified Opportunity Zone property includes newly issued stock, partnership interests, or business property in a Qualified Opportunity Zone business).
There are additional requirements for Qualified Opportunity Zone Businesses and qualifications for Qualified Opportunity Zone Business Property that must be met under the statute and regulations.