- September 16, 2022
- Posted by: Gunveen Bachher
- Category: Real Estate Taxation
Austin has owned an apartment in Nevada for over 10 years. This year, he sold the apartment and has taxable capital gains of $1.5million and instead of paying $300,000 ( $1.5m *.20) of capital gains taxes, Austin decides to reinvest all his capital gains into a Texas Ozone Fund.
He therefore pays $0 in capital gains taxes this year on the sale of his Nevada apartment.
After holding this investment in Texas Ozone LLC for 7 years, Austin’s capital gains are permanently reduced to 15%, down to $1,275,000 ( see table below).
At a 20% capital gains tax rate, Austin saved $45,000 in taxes. However in 2026, he is required to pay taxes on the remainder of this deferred capital gains from the sale of his Nevada apartment of $1,275,000.
| Gain on Sales | $1,500,000 |
| 15% reduction of gain after 7 years ($1.5m* .15) | ($225,000) |
| Adjusted Tax Deferred | $1,275,000 |
| Capital Gains Tax Rate | 20% |
| Taxes Due in Year 2026 | $255,000 |
However, Austin decides to continue holding on to the property, and after 10 years of ownership, he would also be able to receive permanent tax free appreciation on the apartment held in Texas Ozone Fund LLC. At the end of 10 years, the Texas apartment is now worth $2,700,000. Assuming a simple $0 for depreciation, here is what the benefit looks like:
| Fair Market Value | $2,700,000 |
| Tax Basis after 2026 Gain Recognition | ($1,500,000) |
| Tax Free Gain | $ 1,200,000 |
| Capital Gains Tax Rate | 20% |
| Total Permanent Tax Savings(1.2M*.20) | $240,000 |
In the above example, Austin would be able to pay $0 taxes on the appreciation of his Texas apartment and save up to to $240,000 of taxes permanently.
This is a tax windfall with which he receives all 3 benefits: tax deferral, tax reduction, tax free growth.
Useful tips:
- The Opportunity Zone Program allows you to defer taxes only to 2026. This means that you would need to pay taxes once the program comes to an end unless the Congress decides to extend it on the deferred gain in 2026 regardless of whether or not you sell the property.
- It is a great last minute fix for investors who either failed a 1031 exchange or have taxable money from a 1031 or any capital gains transaction on which they would like to get their taxes deferred on.
- You only need to reinvest the capital gains portion into an Ozone fund in order to defer taxes( for example, you can sell your property, take some cash out, reinvest the remaining cash and still defer 100% of your taxes).
- Eligible for a permanent tax reduction if held longer than 5 years.