The OZA calculator illustrates the potential after-tax return for an investment made into a QOF prior to the yearend of 2019, versus the after-tax return of a traditional investment. This model is strictly hypothetical and for illustrative purposes only, it is not intended to reflect actual returns for any individual investor.
Both investment models assume the reinvestment of a realized capital gain, subject to the US federal long-term capital gains tax rate of 23.8 percent. The user can select an investment amount, along with an annual appreciation rate of 5%-20%. It should be noted that these calculations compounds interest annually, both for the traditional investment and the OZ investment.
We have identified the return for 3 separate investment-holding periods; five, seven and ten years. For the purpose of the below illustration, we will assume rolling over (exchanging) an initial capital gain equal to $1M.
The Traditional Investment
This calculation assumes an initial 23.8 percent LTCG (20% federal and 3.8% net-investment income tax) multiplied against the initial capital gain to be invested. For instance, a traditional $1M capital gain would provide a return of, roughly $762,000, after tax, available for re-investment. This remaining balance would compound annually at the chosen rate of return until sold after year’s 5, 7, and 10, respectively. Once sold, any gain would again be subject to the LTCG tax liability of 23.8 percent.
The QOF Investment
The five-year calculation assumes a deferment of the LTCG tax on the initial gain until a sale at the end of year five. This allows the exchange investor to reinvest their entire gain of $1M, per the example above, compounding the investment at the selected rate of return until the end of year 5. Upon sale, at the end of year 5, the deferred LTCG tax from the initial investment is due. However, the taxable amount is reduced by 10 percent (a 10% step up in basis) to $900k, to then be taxed by the 23.8 percent. In addition to paying LTCG tax on the deferred portion of the initial gain, any additional gains earned from the QOZ investment sale are also subject to LTCG at a tax rate of 23.8 percent.
The seven-year calculation assumes a deferment of the LTCG tax on the initial gain until a sale at the end of year seven. Allowing the exchange investor to reinvest their entire gain of $1M, per the previous example, compounding at the selected rate of return until the end of year seven. Upon sale at the end of year seven, the deferred LTCG tax from the initial investment is due. However, the taxable amount is reduced by 15 percent (a 15% step up in basis) to $850k, to then be taxed at the 23.8 percent rate. In addition to paying LTCG tax on the deferred portion of the gain, initially invested, any additional gains earned from the OZ investment sale are also subject to LTCG at a tax rate of 23.8 percent.
