From Taxing to Relaxing: Your 3-Step Blueprint to Opportunity Zones

From Taxing to Relaxing:…

We've all heard the saying, "Nothing is certain except death and taxes." But savvy business owners and investors are challenging that notion with the clever use of Opportunity Zone (OZ) strategies, making taxes a little less inevitable.

In 2018, a transformative shift in the federal tax code opened doors for taxpayers. Now, those selling appreciated assets can choose between paying immediate income tax or deferring that payment by channeling taxable income into OZ business ventures. The benefits? A deferral on capital gains tax until 2027, and if you hold onto that OZ investment for a decade, a 100% tax-free exit. What's more, invesmtents made into Ohio OZs can apply for a 10% state income tax credit within just four months post-investment.

Did you know? The aim of opportunity zones was to fuel private investment in regions still grappling with the aftermath of the Great Recession. Fast forward to now, and we're seeing a booming $34 billion economy sprouting from private OZ business ventures.

Your Opportunity Zone Blueprint in Three Steps:

  1. The Quick Deferral Dance: Made a sale recently or planning to? If it's within a 180-day window, then it's prime time to mull over investing in a qualified opportunity fund (QOF) for tax deferral.
  2. Decision Time - DIY or Syndication?: Should you create your personal QOF or join a syndication? Regardless of your choice, funds need to flow into the QOF account within the 180-day timeframe.
    • A taxpayer who makes a timely investment into a QOF would make two OZ-related filings on their annual tax return:
      • IRS Form 8949, Sales and Other Dispositions of Capital Assets; and
      • IRS Form 8997, Initial and Annual Statement of Qualified Opportunity Fund (QOF) Investments.
  3. Playing by the Rules: Ensure your QOF maintains 90% of its assets in qualified opportunity zone property (QOZP). Merely being located in an OZ is not enough; a monthly penalty awaits any deviation from this standard.
    • In addition to the taxpayer filings stated above, the QOF would file an IRS Form 8996 to self-certify and annually report compliance with the 90% investment standard.
    • Investors are eligible to apply for the Ohio OZ income tax credit in the month of January or July following (a) the date of the applicant's investment into the QOF and (b) the date of the QOF's investment into the QOZP.

A Scenario:

To summarize the basic timing rules and tax mechanics, consider the following hypothetical:

  • Step 1: On June 16, 2023, Audrey sells several stocks and an investment property for a $1 million profit.
    • After consulting with her CPA, Audrey has determined that she is subject to a 20% long-term capital gains rate, resulting in a capital gain tax liability of $200,000.
  • Step 2: Rather than pay this tax to the IRS on her 2023 return, Audrey considers a QOF syndication but decides to defer the gain by investing into her own self-directed QOF.
    • Audrey organizes a LLC for tax treatment as a QOF, opens a bank account for the QOF, and invests the $1 million profit into the QOF within 180 days of the sale of each capital asset. Audrey has achieved her immediate goal of deferral of an imminent capital gain tax liability.
  • Step 3: Audrey decides that the QOF will invest into an apartment building located in an Ohio opportunity zone.
    • After consulting with counsel, Audrey decides to invest into the property through a subsidiary LLC that is organized for tax treatment as a "qualified opportunity zone business" (QOZB), leveraging her $1 million in equity with a $4 million loan.
    • Audrey has achieved compliance with the 90% investment standard, and has up to 30 months to close on the acquisition and complete renovations.
    • Audrey files Form 8949, Form 8997, and Schedule K-1 with her annual tax return, and Form 8996 for the self-directed QOF.
    • Audrey files an application for a $500,000 Ohio OZ tax credit on January 10, 2024 (10% of $5 million).

In this simplified example, Audrey's decision to organize her investment in compliance with the federal and state OZ rules potentially yields millions:

  1. April 2024: Audrey is awarded a $500,000 Ohio OZ tax credit. She decides to sell the tax credit at 85% of face value, generating $425,000 in revenue.
  2. April 2027: Audrey's deferred capital gains tax bill becomes due and payable ($200,000), which she can cover by revenue or a cash-out refi of the investment property.
  3. June 2033: Audrey becomes eligible for a tax-free exit. If she sells the property for $8 million, then she can elect to step up her basis to an amount equal to the sale price, resulting in no tax on her $7 million profit.

The Bigger Picture:

Opportunity Zones are not a one-size-fits-all strategy. They demand personalized planning. Their flexible appeal extends to both real estate and business ventures, setting them apart from typical 1031 exchanges. Before diving in, it is critical to consult professionals to tailor the best OZ strategy for you.

Interested in pinpointing opportunity zones? Dive into the interactive map on the Treasury Department’s website at