How to navigate through the Opportunity Zone tax maze

To get any federal tax break for investing in an Opportunity Zone fund — an entity making qualified investments in designated economically distressed areas — investors must have a capital gain in an asset, sell that asset, defer tax on the gain and reinvest the gain in the fund no later than Dec. 31, 2026.

To show how it works, we’ll say Jack has a gain in Apple stock.

(1) Jack sells his Apple stock and, within 180 days, reinvests the profit (not the entire sales proceeds) in a qualified Opportunity Zone fund. (If the gain came from a partnership, the 180-day clock would start at the end of the partnership’s year, usually Dec. 31.)

(2) Jack defers paying federal tax on his reinvested Apple profit until Dec. 31, 2026, or the year he sells the O-zone investment, whichever comes first. He lets the IRS know he’s deferring the gain by filing Form 8949 with his tax return the year he sells Apple.

(3) When the Apple tax comes due, Jack can exclude 10 or 15 percent of the gain from federal tax if he held the O-zone investment for at least five or seven years, respectively.

(4) When Jack exits the O-zone, he pays no federal tax on his profit in the fund if he’s held it for at least 10 years.

Timeline: To get the 15 percent discount on his Apple profit, Jack must invest in the Opportunity Zone fund by Dec. 31, 2019. To get the 10 percent break, he must do so by Dec. 31, 2021. If he invests in the fund between 2022 and 2026, he gets no discount on the Apple gain but can still defer the gain until 2026 and qualify for the tax-free gain on the fund. Investors have until 2047 to get out of the O-zone fund and realize tax-free gains if the investment was held for 10 years.

— Kathleen Pender, [email protected]