Opportunity Zone Tax Deferral Question

[Gaurav Mehta]

Hi,

I have a question about Opportunity Zone Tax Deferral. Scenario below.

Say I buy a property for $1 Million (Setup a Op Zone Fund and fund it with $200K Cap Gains. To keep it simple I will assume that I only buy this 1 property using the fund)

Capital Gains Invested: $200K

Loan Used: $800K (30 years @3%)

If I buy the property in 2019 and hold the property for 7 years until 2026, I can defer the capital gains tax. Now my question is

In 2027 when I am filing taxes for 2026, Do I have to pay 85% of Tax on Capital Gains invested or the value of Opportunity Zone Fund? 

The capital gain in the fund that is used to buy the property will be 200K but over time the 800K loan will be paid down. With the 3% loan rate at end of 2026, loan balance will be ~635K (meaning $165K equity increase). 

Does this mean that I own Capital Gains Tax on $200K initial investment or on [$200K + ($800K-$635K=$165K)] = $365K

Thanks

[Lance Lvovsky]

@Gaurav Mehta

The deferred capital gain is recognized December 31,2026 and due by April 15 2027. Assuming you meet the 7 year holding period, then you would get a step up in basis to 15% and recognize capital gain of the remaining amount.