The deferral and potential haircut on the invested gains are the up-front benefits, but the larger benefit is a step-up in basis on exit if invested via deferred gains and held for over 10 years!
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What are some other benefits than deferral of the gain when investing in OZs?
What are some other benefits than deferral of the gain when investing in OZs?
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The biggest benefit is the exclusion of gain on all post-investment appreciation after 10 years from federal tax. Hence, if you invest $1,000,000 and sell it for $5,000,000 after 10 or more years, the entire $4 million gain is not taxable for federal purposes.
Tax-free compounding of that investment, 10% reduction in federal and conforming state purposes if the investment is through a QOF and the interest is held for five years. Tax free exists on sales of the QOF interest after 10 years, including no payment of depreciation recapture.
The entire driver of the program is the 10-year benefit, which excludes all investment profit (including recapture) from income tax. The deferral does not really move the needle for most investors.
If you hold the investment for 10 years, then complete exclusion of the federal tax on the sale of the reinvested interest.
The benefit of investing in a QOF is the deferral of the taxation of the gain, in addition to step-up in basis of the investment, depending on the time the investment is kept. If the investment is kept for at least 5 years, you will obtain a 10% step-up in basis, which is zero. That is, you will pay tax on only 90% of the deferred gain. In addition, if the investment is kept for at least 10 years, the increase in the value of the investment ("secondary gain") will never pay income taxes.
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