There are three tax incentives associated with the OZ program:
- Temporary Deferral – If invested in a qualified OF, certain realized gains will not be included in gross (taxable) income until the earlier of the following dates: when the OF is disposed; or December 31, 2026.
- Example: An investor rolls over $100 of capital gains into the OF. Taxation on that $100 is deferred until 2026.
- Step-up in Basis – The basis is increased by 10% if capital gains reinvested into an OF are held by the taxpayer for at least 5 years, and increased by an additional 5% if held for at least 7 years. Thus, up to 15% of the original gain is exempt from taxation.
- Example: An investor rolls over $100 of capital gains into the OF. Taxation is deferred on the $100, and the investor pays taxes on only $90 if investment is held for 5<x<7 years, or on only $85 if investment is held 7<x<10 years. Investor also pays capital gains tax on appreciation of the original $100.
- Permanent Exclusion – If an investment in an OF is held for at least 10 years, the gains accrued in that investment (once sold or exchanged) are exempt from taxation.
- Example: An investor rolls over $100 of capital gains into the OF. Taxation is deferred on the $100, and the investor pays taxes on only $85. Investor pays no taxes on appreciation.
On Dec. 31, 2026, the lesser of the following will be recognized:
- The remaining deferred gain (accounting for step-up basis)
- The fair-market value of the investment in the OF
An investor may defer gains invested into an OF during the 180-day period beginning on the date of sale of the asset to which the deferral pertains.