Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / How Ultra-Wealthy Families Use Opportunity Zone Funds for Tax-Deferred Gains
Transcript
- Lucas: There is a tax strategy that lets you take a million dollars in capital gains from selling Apple stock, put that money into a real estate development in a designated low-income community, and not pay a dime of federal tax on those gains until 2027 — and even then, you get a discount. Luna: You are talking about Opportunity Zones. I feel like we hear the term thrown around, but the mechanics are surprisingly specific. Lucas: Incredibly specific. The law was part of the Tax Cuts and Jobs Act of 2017, but it really hit its stride in the last couple years as regulations got finalized. As of late 2025, the IRS clarified several grey areas around what qualifies as 'substantial improvement' and how fund timelines work. So the strategy is more structured now than it was five years ago. Luna: Let's start with the basics. A client has a big capital gain — say from selling a business or a concentrated stock position. How do they use an Opportunity Zone fund to defer the tax? Lucas: They have 180 days from the date of realizing the gain to invest that amount into a Qualified Opportunity Fund, or QOF. That fund then must invest at least 90 percent of its assets into qualified Opportunity Zone property — typically real estate or operating businesses located in designated zones. The gain is deferred until the earlier of when the QOF investment is sold, or December 31, 2027. Luna: So if you invest in 2025, the tax on the original gain is due no later than when you file your 2027 return. That is a two-year deferral, minimum. Lucas: Right. And that deferral alone is valuable, but the real carrot is the step-up in basis. If you hold the QOF investment for at least five years, your basis in the original gain increases by 10 percent, so you only pay tax on 90 percent of it. Hold for seven years, and that becomes a 15 percent step-up. So if you invested in 2019, by 2026 — the seven-year mark — you are only taxed on 85 percent of that original gain. Luna: And then there is the holy grail: the ten-year hold. If you hold the QOF investment for at least ten years, any additional gain from the fund itself — the appreciation — is permanently excluded from capital gains tax. Lucas: That is the part that gets ultra-wealthy families excited. You can roll a large gain into a QOF, defer the original tax, get a partial step-up, and then let the new investment compound tax-free for a decade. A family office I know of put roughly $50 million from a stock sale into a mixed-use development in Atlanta's Westside — a designated zone. They bought in 2020. By 2030, if they sell, the appreciation on that development is completely tax-free. Luna: But there are catches. One, the 180-day window creates a time crunch. Two, not all QOFs are created equal — some are poorly managed. And three, you are tying up capital in illiquid real estate for years. If the market turns, you could lose both the tax benefit and the principal. Lucas: That is the risk. The IRS doesn't guarantee returns — it only guarantees the tax treatment if you follow the rules. So due diligence on the fund manager is critical. We have seen QOFs that invested in struggling retail centers that never recovered post-pandemic. The tax benefits are useless if the investment goes to zero. Luna: So who is this actually for? It seems like it works best for someone with a massive, one-time gain who can afford to lock up capital for ten years and is comfortable with real estate risk. Lucas: Exactly. Think of a founder who sells a company for $100 million, or a family that has held a concentrated stock position for decades. They have a huge embedded gain, they want to diversify, but they hate the tax bill. An Opportunity Zone fund lets them defer, reduce, and eventually eliminate tax on future appreciation — if they play the long game. Luna: And there is a community development angle too. These zones are meant to spur investment in low-income areas. So it is not just tax avoidance — it is deploying capital into neighborhoods that need it. Lucas: That is the policy intention. The Treasury Department designated over 8,700 zones across the country. In practice, the results have been mixed — some zones saw luxury condos and displacement, others got much-needed affordable housing and job-creating businesses. But for the wealthy families involved, the tax math is very compelling. Luna: Let's talk about the timeline. If someone realizes a gain in June 2026, they have until December 2026 to invest in a QOF. Then the deferral runs until December 2027 for the original gain. If they hold until 2036, the appreciation is tax-free. That is a pretty long horizon. Lucas: It is. And that is why family offices with permanent capital are natural fit. They are not worried about liquidity needs next year. They can think in decades. I know a multi-family office in Seattle that allocated 15 percent of its private equity sleeve to a QOF that is building a life sciences campus in a zone near the University of Washington. They expect a 12 to 15 percent internal rate of return, and the tax-free step-up is just the icing. Luna: One thing I have heard people worry about is the sunset. The deferral only applies to gains realized before December 31, 2026. After that, the 180-day window closes, and you cannot defer new gains into a QOF. So this is a limited-time opportunity for investors sitting on gains right now. Lucas: That is a crucial point. The law has a sunset for the deferral — the investment has to be made by December 31, 2026, for the gain to qualify. So if you are listening and you have a big gain from earlier this year, the clock is ticking. That said, the ten-year tax-free appreciation benefit is still available for investments made after that date — you just don't get the deferral or the step-up on the original gain. Luna: So after 2026, Opportunity Zone funds become more like regular real estate funds with a potential tax-free exit after ten years. Less powerful, but still attractive. Lucas: Exactly. And some advisors are already planning for that post-sunset world. But for now, the window is still open, and we are seeing a flurry of activity from families trying to get deals done before the end of this year. Luna: One thing I appreciate about this strategy is that it aligns long-term wealth planning with tangible community impact. It is not just a paper shuffle — it is building something. Lucas: That is a good note to end on. And if you find these deep dives into wealth strategy useful, you might want to know what keeps this show going. We don't run ads, we don't sell products — a small group of listeners chips in monthly through buy me a coffee dot com slash fexingo, and that covers the production costs for all the episodes we put out. If you have gotten value from these conversations, that page is the place to show it. No pressure, just a fact. Luna: Yeah, it is a simple way to help. And we appreciate everyone who already does — it lets us stay independent and focus on topics like this without worrying about sponsors. Lucas: Exactly. So back to Opportunity Zones — one final nuance. The IRS recently clarified that if a QOF invests in an operating business, that business must derive at least 50 percent of its gross income from active conduct within the zone. That rules out passive holding companies. So if you are looking at a QOF that claims to invest in tech startups, make sure the startup is actually doing business in the zone, not just registered there. Luna: Good diligence point. So the takeaway: Opportunity Zone funds offer a powerful tax deferral and potential tax-free growth, but they require a long time horizon, careful manager selection, and an understanding of the sunset. For the right family, it can be a win-win. Lucas: And that is the kind of strategy that separates good wealth management from great wealth management. Thanks for listening.