I have heard that December 2021 is the last year an Opportunity Zone investor can invest to be able to get the 5-year tax benefit. What happens if I invest next year? What are my benefits then?
If you invest capital gain in a QOF after Dec. 31, 2021, then you generally will be able to (i) defer all of that gain until Dec. 31, 2026, (unless you have earlier inclusion event), and (ii) exclude any subsequent gain with respect to your QOF interest, if you hold the QOF interest for at least 10 years. Had you invested before the end of the 2021, you could have also permanently excluded 10% of your invested gain (the 5-year tax benefit).
There are two tax incentives you will qualify for. First, you will be able to defer your capital gains tax until Dec. 31, 2026, and pay tax at the 2026 rates. Second, if you hold onto your opportunity zone investment for 10 years, you will be able to sell your opportunity zone investment tax free until Dec. 31, 2047.
The only benefit you lose is the 10% step-up in basis that would've occurred on Dec. 31, 2026, if you invested before the end of this year. The deferral and the 10-year benefit are both still on the table, even after Dec. 31, 2021.
The benefit, set to expire at the end of this year, results in 10% of your deferred gain being eliminated when you pay the tax on your deferred gain in 2026. Investments made after December will still qualify for the 10-year hold and the deferral to 2026, but will not get the 10% haircut.
As the law stands today, any investment after December this year will not receive the benefit of the 10% step up in basis. Meaning, that it will benefit from the deferral of recognition until December 2026 but tax will be payable on 100% of the deferred gain.
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