Opportunity Zones in 2022: A Tax & Financial Analysis

As most investors have learned over the past couple of years, the primary tax benefits of Qualified Opportunity Zone (QOZ) investments are Defer, Reduce, and Pay Zero.

Investors are still able to “Defer” the tax owed on eligible gains until 2026. Investing a larger amount of capital to start will yield positive economic value.

The “Reduce” benefit of the opportunity zone program expired at December 31, 2021. Investors were previously eligible for a 15% and 10% step-up in basis. While QOZ investors can no longer receive a step-up in basis, the good news is that 92.4% of the potential tax benefit, which comes from “Pay Zero,” remains (see table below, available tax benefit in green highlighted text).

The “Pay Zero” tax benefit that is available to QOZ investors means that if investors hold their investment for 10 years, they will be able to exit the investment tax-free, yielding significant tax savings. In the example below, this would be $289,000!

The above computation is great, but two big assumptions are not factored into the potential tax benefits that QOZ investors can receive: (1) accelerated depreciation during the 10-year holding period (let’s say, through the implementation of a cost segregation study) or (2) the ability to eliminate gains from depreciation recapture through the “Pay Zero” benefit.

Over the past couple of years, CLA has become a leader in the opportunity zone compliance and consultation space. Have questions? We have answers. Please reach out to Brian Duren or Ben Darwin for information. CLA Wealth Advisory has multiple QOZ investment opportunities that are available now, through both funds and direct deals. Please reach out to a CLA Wealth Advisor or our Capital Markets team to learn more.

Thanks to Lucas Whelan and Brian Duren for authoring this post!