I understand that both the 5% (holding investment for 7 years) and the 10% (holding for 5 years) are tied to the 12/31/26 date, and thus anyone investing going forward would not be eligible for those benefits. But can someone explain via example how that would have worked?
if you had a $10M gain, invested the whole amount in an OZ, you defer the cap gains tax until 12/31/26. With the step up in basis, would that mean that instead of paying on the $10M, it would have been calculated on $9MM or $8.5MM depending on how much the step up was?
Bump
the 2026 date is just the sunset date for opening an OZ investment vehicle. My understanding is that you can still capitalize an OZ deal/create an OZ business plan and date it December 2026, and start the horizon at that point (ie 6 months to deploy cash flow into QOF and 6 months additional to deploy capital at QOZB level, 3 years total to invest all qualifying capital in deal). The tax benefit deferral is still available for the full ten year period, ie through 2036. At that point you get the 10% step up in basis and if held for the full ten years the profits over your invested basis are also exempt from any taxes at all. You should talk to OZ counsel on the finer points.
So, the OZ program has three primary benefits:
(1) The initial realized gain is deferred until 12/31/26 at which point it is a tax liability that is recognized in that year.
(2) The initial gain receives a "basis step up" of 15% if the gain was realized by 12/31/19 (seven years prior to 2026) and 10% if the gain was realized by 12/31/21 (five years prior to 2026).
(3) If an OZ investment meets the eligibility criteria and the investor holds for 10+ years, once the investor sells, the capital gain in the OZ investment will be fully exempt from any capital gains tax liability AND depreciation recapture.
egold70 You are correct in your understanding. Your capital gain would be reduced by 10% or 15% depending on when the gain was realized (and assuming you met the relevant OZ eligibilities).
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