The Dangerously Dangling Carrot

Mark Hume |

One of the more dangerous, dangling carrots I have seen lately is the Qualified Opportunity Zone (QOZ).

The claim: “Take Highly Appreciated Stock, Sell It, Invest in a QOZ, and Your Taxes Disappear”

Sounds compelling, doesn’t it? Too good to be true? At least worth a closer look.

What is a QOZ?
A QOZ is an economically distressed community. Preferential tax treatment incentives encourage new real estate investors to invest in the area.

Normally, if you sell investments with a sizable gain you owe capital gains tax. A QOZ eliminates some of that tax liability if you follow specific rules. But you still have a tax bill on part of your gains.

Here are some very basic guidelines to QOZ investments:

  • Transfer your original investment into a private, non-transparent group within 180 days. And assume the money can’t be touched for 10 years.
  • After 5 years, your basis in the deferred gain increases by 10%.
  • After 7 years, your basis in the deferred gain increases to 15%. (This is only good through the end of that year.)
  • On December 31, 2026, you owe tax on your deferred gain if you still hold the QOZ investment. You pay tax on 85% of your gain. (I would argue this is not worth the risk.)
  • Stay locked up for 10+ years, and eligibility increases equal to your investment’s fair market value on the date you sold or exchanged it.
    • So, despite owing a potentially hefty tax bill for 2027, leave your QOZ investment locked up. That maximizes your preferential tax treatment on the real estate investment itself.

Even more red flags to consider before you dive head-first into QOZs:

  • Volatile Real Estate markets
  • Hyper-concentrated investment
  • Fund management risks
  • Political shifts
  • Fees
  • Legislative rules

This is a complex topic without full legislative clarification. It is an interesting opportunity and worth further investigation. You may turn a profit. But be wary of those dangling carrots! Be methodical and thorough as you investigate this new investment opportunity.

Mark Hume