Ozone Investing 101: The Basics


Do you want to reduce the amount of taxes you pay when you realize a capital gain? Well you stumbled upon the right article. The Federal Government released a new program that allows you to avoid paying tax on capital gains until 2026 and lower the tax on these capital gains if you stay in the program for certain periods of time. The Opportunity Zone program provides taxpayers incentives for investing in federally and state designated economically deprived areas. How do you obtain these benefits? Well, let’s walk through it step by step—


(1)    Make Sure Your Capital Gain Qualifies for the Federal O-Zone Program


Capital gains are the only types of taxable income that qualify for this O-Zone Program. The good news is that the capital gains can be derived from the sale of any capital property you own—sale of real property held for investment, sale of stock held for investment, sale of expensive paintings, etc.


However, you need to be careful of gains from the sale of property to related parties. If the gain is from such a sale, then your gain won’t qualify for the O-Zone program. Related parties generally consist family members, entities that have common ownership, etc. Make sure to ask your tax advisor if your gain qualifies--if so, move onto Step 2.



(2)    Invest proceeds from capital event into a Opportunity Zone Fund (“O-Zone Fund”) within 180-days


If you have a capital event during the year (i.e. sale of real property, sale of stock, sale of expensive painting), you would normally have to pay tax on the capital gain you realize from the sale. However, to participate in the O-Zone Program and defer paying taxes, all you have to do is invest the proceeds from the sale into an O-Zone Fund within 180 days of the sale. The challenge with this step is actually finding an O-Zone Fund that meets your needs.


There are plenty of these funds out there, however, there are quite a few of them advertising themselves as O-Zone Funds but really are not compliant with federal law. Always make sure to consult your tax advisor before placing an investment with an O-Zone Fund to make sure they are in compliance with federal regulations.



(3)    Once Properly Placed, Sit Back and Let the Tax Benefits Roll-In


Once your money is in a qualifying O-Zone Fund, all you have to do is sit back, relax, wait, wait … and wait and then let the tax benefits roll in. To obtain all the benefits of the program—be patient! In addition to getting deferral on your capital gain until 12/31/2026, there are several additional tax benefits provided to those patient taxpayers who hold their interest in the O-Zone Fund for certain periods of time.


If you hold your investment in the fund for 5-years, then 10% of the gain you invested won’t be taxable when 12/31/2026 hits. If you hold your investment in the fund for 7-years total, and additional 5% (now 15% total) of the gain invested won’t be subject to tax when 12/31/2026 hits. Finally (and best), for those super patient taxpayers, if you hold your investment in the fund for 10+ years, then you don’t pay any tax on the appreciation of your interest in the fund when you sell-out.


In conclusion, this program is complex and should not be taken on alone if you are not tax-savvy enough to understand the law and new (and still upcoming) guidance in this area. Always make sure to consult a tax advisor before diving head-first into an O-Zone Fund—but once you do, be patient, and let those tax benefits roll on in.

Lisa Merage