Opportunity Zones present investors with a way to defer federal taxation on gains from the sale of property for as long as eight years, and even avoid taxation altogether on gains recognized on the future sale of your investment in the various Opportunity Zones funds that will be set up as part of the new tax law.
You’ll have 180 days following the sale of property that generates the gain to make the decision to invest in an Opportunity Zone fund. From that point, you can defer taxation on that gain to as late as December 31, 2026, or when your interest in the fund is sold, whichever comes first.
You’ll also benefit by receiving a reduction in the gain on the sale of your investment in the fund equal to 10 percent of the gain deferred on the original sale of property. To do so, you must maintain an investment in the fund for five years and a reduction in the gain equal to 15 percent of the gain deferred after seven years. After a full ten years, your investment will benefit from a permanent exclusion of gain on the sale of your investment in the fund and thereby avoid federal taxation altogether on the build-up in value of your fund investment.
It’s important to note that this permanent gain exclusion is only with respect to the build-up in value of your investment in the fund and not with respect to your gain on the original sale of property, which you used to invest in the fund. It bears repeating that you will eventually be taxed on the original sale of the property the earlier of the sale of the fund or December 31, 2026.