For more than 100 years, real estate investors have relied on the 1031 exchange to defer their capital gains taxes. A new permanent change to the tax code introduces significant tax benefits, and capital gains well beyond real estate may qualify.
* Investors must satisfy a number of requirements, including minimum holding periods, to qualify for opportunity zone tax benefits. Consult your own tax advisor.
An owner sells the business and walks away with a $3 million capital gain. A founder exits a concentrated stock position and realizes $1.5 million. Two different assets, and then the same meeting with the accountant, where the number that matters is the one due in April.
Many sellers treat that meeting as the end of the tax question. For accredited investors it often is not, because the tax code gives a recognized capital gain somewhere else to go, and a limited amount of time to send it there.
If you have recently sold, or are preparing to sell, a business, a concentrated stock position, investment real estate, cryptocurrency or another appreciated asset, and you expect a substantial capital gain, the rest of this article was written for you. It is general information rather than tax advice. Anything you read here should be checked against your own circumstances with your accountant and your financial advisor before you act on it.
An eligible capital gain can be invested into a qualified opportunity zone investment offering, which may defer the federal tax on it rather than paying in the spring. Two details decide whether that is realistic, and both surprise people.
Your basis, meaning what you originally put into the asset, stays with you. Sellers frequently assume the whole of the proceeds would have to move into an investment offering, and that assumption is a common reason the idea gets dismissed before anyone looks at it properly.
Figures are illustrative and are not a projection. Basis, the character of a gain and its tax treatment depend on individual facts and circumstances. A sale often produces several tax components, among them capital gain, ordinary income and depreciation recapture, and only eligible capital gain may be invested for opportunity zone treatment. Consult your own tax advisor.
An accredited investor generally has 180 days from the date the gain is recognized. Where a gain reaches you through a partnership, an S corporation, a trust or an estate, that start date can fall well after the transaction itself, sometimes by months. Consult your financial professional or tax advisor.
Congress created opportunity zones in 2017. What changed is that the program is now permanent, and a rewritten set of tax advantages takes effect in January 2027. The industry calls it OZ 2.0, and for a gain recognized within the 180 days before that date, three provisions are available.*
Federal tax on the capital gain you invest may be deferred for five years from the date of investment. An investment made in early 2027 defers that tax to 2032.
Hold for five years and the deferred gain may qualify for a 10% step up in basis.
Hold the investment for at least 10 years and the appreciation on it may be excluded from federal tax entirely.
* Investors must satisfy a number of requirements, including minimum holding periods, to qualify for opportunity zone tax benefits. Consult your own tax advisor. Deferred tax is not forgiven and becomes due at a later date.
Four questions about what you sold and when, and we will show you what the timing means.
Gains from many appreciated assets may be eligible, not only real estate.
This fit check is educational and based solely on the answers provided. It is not a determination of eligibility, suitability or accredited status, and it is not tax, legal or investment advice. Opportunity zone treatment depends on individual facts and circumstances. Consult your own tax and legal advisors.
A 1031 exchange works, but it never finishes: sell the replacement property and the liability moves into the next one. It is also limited to real property, which rules out the business seller and the founder holding stock. An opportunity zone investment takes a gain from almost any appreciated asset and runs to a defined end instead, a 10-year hold, after which the appreciation on the investment itself may be excluded from federal tax.
“1031 for real estate is deferral. It's not exclusion, so you have to continue to exchange every time you sell.”
If you are facing a large capital gains tax bill and a five-year deferral is worth exploring, the next question is who you are investing with. A capital gain placed into one of these offerings goes into a specific piece of ground, with a specific developer, for roughly a decade.
Capital Square is a national sponsor of tax-advantaged real estate based in Glen Allen, Virginia, founded in 2012, with more than $9.1 billion in real estate transacted across 145 or more sponsored investment offerings. It develops its own projects rather than hiring someone else to, and since 2019 has raised more than $255 million across eight prior opportunity zone offerings.
Capital Square's Scott's Addition development portfolio. Completion dates from the Capital Square Development Track Record, July 2026. Opportunity Zone Fund IX is under development and the estimated completion date is not guaranteed.
Opportunity Zone Fund IX is the sixth development Capital Square has built in one 20-block Richmond neighborhood. The other five are finished and standing, which is the opposite of buying into a tract where nothing has been built yet.
Scott's Addition has been an opportunity zone since the program began. It now commands the highest rents in Richmond, more than 34% higher per month than downtown,1 and its median household income, education levels and employment rate all run ahead of the city's.2 It has improved its way out of the measures that made it an opportunity zone, and no tract under the new map will have a record like this behind it.
“Today's tracts have track records. Future tracts have hopes and prayers.”
1. Walker & Dunlop, as cited in the CSRA Opportunity Zone Fund IX, LLC Offering Brochure, Capital Square.2. U.S. Census Bureau, American Community Survey, as presented in the CSRA Opportunity Zone Fund IX, LLC Fact Sheet, Capital Square.
A 2.18-acre site at the intersection of Roseneath Road and Moore Street, in the middle of Scott's Addition, being developed into a mixed-use community of 220 traditional apartments and 100 furnished apartment hotel rooms with ground-floor retail. Approximately 95 of those rooms are to operate under the Apartments by Marriott Bonvoy flag.
* Investors must satisfy a number of requirements, including minimum holding periods, to qualify for opportunity zone tax benefits. Consult your own tax advisor. Given the early development stage of the project, all features, specifications and plans described here, including the manager's intention for the project to have an apartment hotel component, are subject to change.
FTI Consulting, commissioned by Capital Square, has analyzed the economic and fiscal impact of these developments in Richmond, Raleigh and Charleston. Otis, the Fund V project across the street from the Fund IX site, won a 2024 CoStar Impact Award.
Opportunity Zone Fund IX is a Rule 506(c) private placement open to accredited investors, with a minimum investment of $100,000. Accredited investor: income over $200,000 individually or $300,000 with a spouse in each of the last two years, or net worth over $1 million excluding a primary residence.
Two dates decide most of this: the day your 180 days run out, and January 2027, when the rewritten program takes effect and Capital Square begins accepting equity. A short conversation with our Investor Relations team provides clarity.
Investors must satisfy a number of requirements, including minimum holding periods, to qualify for opportunity zone tax benefits. Consult your own tax advisor.
We'll discuss the new opportunity zone program's tax benefits, Capital Square's Opportunity Zone Fund IX in Scott's Addition, and answer your questions.
The full Opportunity Zone Fund IX page covers the same ground in more depth: the three OZ 2.0 provisions and the conditions attached to each, how Scott's Addition compares with the city of Richmond on census measures, the offering terms in full, and the questions accredited investors ask most often.
See full offering informationReady to talk through your gain and your timing?
