Turn Your Business Sale into Tax Free Growth with Qualified Opportunity Zones

Almost every strategy that we’ve covered in our series thus far has required proactive planning that takes place months, if not years, before the business is sold. That’s because there are more options the earlier that you plan.

But what happens when you get that call out of the blue offering you exactly what you were thinking your business was worth? While proactive planning is best, it’s not always possible.

Luckily, there are options available after a business is sold as well and Qualified Opportunity Zones are one of these options.

What is a Qualified Opportunity Zone Fund (QOZ)?

QOZ Funds were created in the 2017 tax bill and were designed to bring investment in underprivileged communities in exchange for tax benefits. To qualify, QOZ Funds must invest in certain disadvantaged census tracts, use 90% of their assets in those projects, and substantially improve their properties.

If they do this, investors in the fund can defer their gains after the sale of their own business. The second, and possibly larger, benefit is that they allow you to completely eliminate the gains on the QOZ Fund itself after 10 years. While QOZ’s were made permanent in the One Big Beautiful Bill Act, they are in a weird state of limbo until 2027 as you will see here.

How do Qualified Opportunity Zones Help You Save on Taxes?

To achieve capital gains deferral with a QOZ Fund, you must invest your funds within 180 days of closing (think of this as similar to a 1031 exchange).

QOZ Deferral Periods

If you invest before 2027, you can defer your gains until 12/31/2026.

Beginning in 2027, you will be eligible for 5 years of tax deferral based on your investment date.

So, for those who sell a business this year, you’re really only buying about a year of tax deferral. This helps, but it obviously becomes more attractive for business owners who sell after 2027 to get the full 5-year deferral period.

QOZ Basis Boost

Obviously, you wouldn’t invest in a QOZ Fund where you expect no growth. If you did, you’d be making a bad financial decision purely to save taxes, and we don’t do that here! Luckily, once you’re invested in the fund there are additional benefits on the growth of the QOZ investment.

Beginning in 2027, you receive a 10% boost of the deferred gain added to your investment’s basis, which carries over from your business, once you’ve held the fund for 5 years. If you invest in Qualified Rural Opportunity Zone, this figure jumps to 30%, which is substantial.

There was a 10% bonus at 5 years and a 5% bonus at 7 years for pre-12/31/2026 property but you had to have reached those milestones before 12/31/2026 which is not possible now.

QOZ Appreciation Exclusion

The major benefit of a QOZ Fund is the appreciation exclusion. If you invest $10,000,000 into a QOZ, hold the fund for 10+ years, and it grows to $20,000,000; the $10,000,000 in gains on your QOZ are tax-free.

This doesn’t mean that your original business sale is tax-free. Remember you pay those taxes at the end of your 5-year deferral period. Only the gains on your new investment are excluded. This is still a huge benefit and is a reason to consider QOZs on their own even without a business sale involved.

There are a quite a few differences in pre-2027 investments and post-2027 investments. Here’s a quick comparison.

What requirements are there to utilize a QOZ Fund to Save on Taxes?

• Invest within 180 days
• Hold for 5 years for deferral (starting in 2027)
• Hold 5 years for 10% basis improvement (starting in 2027)
• Hold for 10 years for appreciation exclusion
• Several investment requirements on the fund itself

What drawbacks exist in a QOZ Fund?

• The largest drawback is the limited deferral period until 2027 which leaves business owners in limbo until then. In my opinion, this limits the reinvestment effectiveness of a QOZ Fund until 2027.
• 10 Year Lockup to achieve appreciation exclusion
• Finally, if your taxes are deferred for 5 years and your money is locked up for 10 years, you need to have a plan for how you will pay your taxes in year 6.

How a QOZ Fund Helped the Daniels Family Save Money on Taxes

Ah, here we are again with our favorite Daniels family. The Daniels own a $10,000,000 engineering firm with $500,000 of basis and are looking to sell. They’re interested in looking at a QOZ Fund to save on taxes.

To simplify our comparison, the chart below assumes a 7% rate of return for both the QOZ Fund and the non-QOZ Fund Option. The QOZ Option assumes the growth is tax-free and the non QOZ assumes that the family disposes of their new investment in ten years, with no taxes along the way so we can see the impact of the appreciation exclusion. It also assumes the Daniels sell in 2027 so they can take advantage of the new rules.

Let’s see how it stacks up.

As you can see from the chart above, the QOZ decision results in ~$1.4m of additional wealth at the end of 6 years, which is mainly due to the 5-year deferral and the 10% basis boost received.

It also results in ~$4,400,000 in additional wealth at the end of 11 years which is due to the deferral, basis boost, and the appreciation exclusion.

The main thing that would impact the Daniels would be when/if they need this money. How are they going to pay those taxes in year 6? One option could be to utilize a tax loss harvesting strategy in combination with the QOZ. That’s where planning comes in and you can supercharge your savings.

Also, from a planning perspective – should all of their money go into one investment? Probably not. They’d be much better off investing in multiple funds or investing only a portion of their proceeds into a QOZ Fund.

Having said that, the results are fantastic and show you the power of a QOZ Fund at deferring and even eliminating taxes.

Who is a Qualified Opportunity Zone Best for?

A QOZ Fund is best for business owners who are planning to sell their business but have either delayed their planning or a great offer out of nowhere that doesn’t allow for preplanning. As long as you’re comfortable with not touching your money for 10 years and have access to cash to pay taxes in year 6, a QOZ could be a great option.

How Ironclad Wealth Management Can Help You Create Your Exit Plan

QOZ Funds are simply one tool in the toolbox, a good one most definitely, but they’re not the right answer to every problem. Ironclad Wealth Management works with business owners to help design the right exit plan to help them reach their goals and optimize for taxes along the way. As part of this, we review several different tax savings strategies and combine them to achieve the best possible outcome for our clients.

Schedule a consultation to see if a QOZ Fund may be right for you and your business sale!

Want to Keep Reading more about saving capital gains on your business sale? Check out our blogs on Asset vs. Stock Deals, Installment Sales, Structured Installment Sales, Tax Loss Harvesting, Charitable Remainder Trusts, Employee Stock Ownership Plans (ESOPs), and Qualified Small Business Stock Exclusions (QSBS).

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