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Tax benefits & the math

Opportunity Zone tax savings: a worked example

On a $1 million long-term capital gain taxed at 23.8% federal, paying the tax and investing the rest leaves about $1,342,600 after 10 years if the investment doubles. Investing the full gain in a standard Qualified Opportunity Fund with the same return leaves about $1,785,800 after the year-5 tax of $214,200, roughly $443,000 more; a Qualified Rural Opportunity Fund leaves about $1,833,400.

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Key takeaways

  • Paying tax at sale on a $1 million long-term gain costs $238,000 at 23.8% federal, leaving $762,000 to invest.
  • In a standard QOF, the full $1 million is invested and the year-5 tax is $214,200 (90% of the gain); in a rural QOF it is $166,600 (70%).
  • If both investments double over 10 years, the taxable alternative nets about $1,342,644 after exit tax; the QOF nets about $1,785,800, because the $1 million of appreciation is excluded.
  • Most of the advantage comes from the 10-year exclusion, not the deferral or step-up, so it depends on the investment actually appreciating.
  • The comparison assumes equal pre-tax returns; fees, risk, liquidity and state taxes can change the answer.

What are the assumptions in this Opportunity Zone example?

The example compares three ways to handle a $1,000,000 long-term capital gain realized in February 2027, using current federal rates and identical pre-tax investment returns. Every number is illustrative.1

Assumptions
ItemAssumption
Gain$1,000,000 long-term capital gain from selling stock to an unrelated buyer, February 2027
Federal rate23.8%: 20% top long-term capital gains rate plus 3.8% net investment income tax
State taxNone (many states tax gains; some, such as California, do not conform to the Opportunity Zone rules)2
Investment returnValue doubles over 10 years (about 7.2% a year compounded), no interim distributions
QOF timingInvested March 15, 2027, within 180 days; year-5 tax paid from other funds; sold just after the 10th anniversary
Fees and riskIgnored to isolate the tax effect; both investments assumed equally risky

These are the rules for amounts invested in a Qualified Opportunity Fund (QOF) after December 31, 2026: deferral until the fifth anniversary, a 10% basis step-up (30% for a Qualified Rural Opportunity Fund, or QROF), and an election to exclude appreciation on a sale after at least 10 years.3,4,5

Strategy A: pay the tax now and invest the rest

Paying the tax at sale leaves $762,000 to invest, which grows to $1,524,000 and nets $1,342,644 after a 23.8% tax on the $762,000 of growth.

  1. 1.Tax at sale: $1,000,000 times 23.8% equals $238,000.
  2. 2.Invest the remaining $762,000 in a taxable investment.
  3. 3.Year 10: the investment doubles to $1,524,000.
  4. 4.Exit tax: ($1,524,000 minus $762,000 basis) times 23.8% equals $181,356.
  5. 5.Net after all federal taxes: $1,524,000 minus $181,356 equals $1,342,644. Total federal tax paid: $419,356.

Fig. 1Strategy A: pay tax at sale, then invest

Illustrative
  • Gain proceeds$1,000,000
  • Tax at sale−$238,000
  • Growth over 10 years+$762,000
  • Tax on growth at exit−$181,356
  • Net after tax: $1,342,644$1,342,644
Illustrative: 23.8% federal rate, investment doubles over 10 years, no state tax.

Strategy B: invest the gain in a standard Qualified Opportunity Fund

Investing the full $1,000,000 in a QOF defers the tax to year 5, cuts it to $214,200 with the 10% step-up, and excludes all $1,000,000 of appreciation at exit, for a net of $1,785,800.

  1. 1.March 15, 2027: invest $1,000,000 in a QOF and elect deferral on Form 8949 with the 2027 return.6 Basis in the QOF interest: $0.
  2. 2.March 15, 2032 (year 5): basis steps up by 10% of the deferred gain, to $100,000. Included gain: $1,000,000 minus $100,000 equals $900,000. Tax: $900,000 times 23.8% equals $214,200, paid with the 2032 return.7
  3. 3.After inclusion, basis is $1,000,000.
  4. 4.Just after March 15, 2037 (year 10): the investment is worth $2,000,000. The investor sells and elects to treat basis as fair market value, so the $1,000,000 of appreciation is excluded.5
  5. 5.Net after all federal taxes: $2,000,000 minus $214,200 equals $1,785,800. Total federal tax paid: $214,200.

Fig. 2Strategy B: invest the gain in a standard QOF

Illustrative
  • Gain invested$1,000,000
  • Growth over 10 years+$1,000,000
  • Year-5 tax on $900,000−$214,200
  • Exit tax on appreciation (excluded)$0
  • Net after tax: $1,785,800$1,785,800
Illustrative: same return as Strategy A; the only tax is on 90% of the original gain at year 5, and appreciation is excluded under the 10-year election.

Strategy C: invest the gain in a Qualified Rural Opportunity Fund

A QROF works the same way with a 30% step-up, so the year-5 tax falls to $166,600 and the net rises to $1,833,400.8

A QROF must hold at least 90% of its assets in Opportunity Zone property in zones made up entirely of rural areas.9 The year-5 math: basis $300,000, included gain $700,000, tax $700,000 times 23.8% equals $166,600. The exit is identical to Strategy B. The step-up difference alone is worth $47,600 more than a standard QOF on this gain. See the 10% and 30% basis step-up.

How do the three strategies compare?

With equal returns, the QOF strategies leave $443,156 (standard) and $490,756 (rural) more after federal tax than paying tax up front.

Fig. 3Net after federal tax at year 10 on a $1 million gain

Illustrative
  • A: pay tax now, invest $762,000$1,342,644
  • B: standard QOF$1,785,800
  • C: rural QOF (QROF)$1,833,400
Illustrative: 23.8% federal rate, investment doubles over 10 years in every case, no state tax, no fees, year-5 tax paid from other funds.
Where the QOF advantage comes from (Strategy B versus A)
Source of benefitApproximate valueHow
Deferral and step-up$261,800The $238,000 that A paid at sale stays invested in B and doubles to $476,000; B then pays $214,200 at year 5 (the 10% step-up accounts for $23,800 of that saving)
10-year exclusion$181,356A pays 23.8% exit tax on its $762,000 of growth; B pays none on its $1,000,000
Total difference in net result$443,156$1,785,800 minus $1,342,644

A stricter comparison charges the QOF for the year-5 tax payment. If the $214,200 paid at year 5 had stayed invested at the same return for five more years, it would have grown to about $302,900 before tax. Subtracting that $88,700 of forgone growth still leaves the standard QOF roughly $354,000 ahead.

How sensitive are the savings to investment returns?

The advantage grows with appreciation, because the 10-year exclusion is worth more the more the investment gains; with no growth, only the step-up is left.

Illustrative net after federal tax at year 10 by investment multiple
Value multiple at year 10A: pay tax nowB: standard QOFB minus AC: rural QOFC minus A
1.0x (no growth)$762,000$785,800$23,800$833,400$71,400
1.5x$1,052,322$1,285,800$233,478$1,333,400$281,078
2.0x$1,342,644$1,785,800$443,156$1,833,400$490,756
3.0x$1,923,288$2,785,800$862,512$2,833,400$910,112

Two cautions. First, the comparison assumes the QOF earns the same pre-tax return as the alternative; a weaker project, higher fees or a forced early sale can erase the tax benefit. Second, if the QOF investment loses value, the year-5 inclusion is capped at fair market value minus basis, which softens but does not remove the loss.10 See the risks of Opportunity Zone investing.

What would change the result for a real investor?

State tax, the type of gain, the hold period and the fund's structure are the four variables that move the answer most.2

  • State tax. A state that does not conform to the federal rules taxes the gain at sale and the appreciation at exit; add those costs to Strategy B. See state tax treatment.
  • Short-term gain. A short-term gain keeps its character when included at year 5, so the deferred tax is at ordinary rates, and the exclusion of appreciation is the same.
  • Selling before year 10. With no exclusion, a year-7 sale taxes appreciation over the $1,000,000 basis. At a 1.62x value (the same 7.2% return), Strategy B nets about $1,261,700 versus about $1,124,600 for Strategy A at the same date: still ahead, but by far less.
  • Depreciation. A real estate or data center QOF passes through depreciation deductions. With permanent 100% bonus depreciation for qualifying property acquired after January 19, 2025, those deductions can be large early on, and a sale of a QOF partnership interest after 10 years with the basis election can avoid recapture.11,5 See depreciation and Opportunity Zones.

What does this look like for a data center fund?

The same math applies to a data center QOF, with two adjustments: the year-5 date usually falls during construction or lease-up, and the exit value depends on a stabilized, actively operated facility.12

Investors should plan to pay the year-5 tax from outside funds, because a ground-up campus may not distribute cash that early. A site in a wholly rural zone held by a QROF moves the result from Strategy B to Strategy C. And the exclusion is only as good as the fund's compliance for the full hold, including active operation rather than a bare triple-net lease. See how a data center Opportunity Zone fund works. If you want to test these numbers against a specific gain, talk to our team.

Common questions

How much tax does an Opportunity Zone investment save on a $1 million gain?

In this illustration at 23.8% federal, the year-5 tax is $214,200 instead of $238,000 at sale, and if the investment doubles over 10 years the exclusion avoids about $238,000 of exit tax. The net result is about $443,000 better than paying tax up front.

Is most of the benefit from deferral or from the 10-year exclusion?

From the exclusion and the extra capital invested. The 10% step-up alone is worth $23,800 per $1 million at 23.8%.

Does the example include state taxes?

No. State treatment varies, and some states, such as California, do not conform to the federal Opportunity Zone rules.

What if the investment does not grow?

With no growth, the only benefits are the step-up and five years of deferral: $23,800 of tax saved per $1 million in a standard QOF, $71,400 in a rural fund.

Why is the year-5 tax paid from other funds?

The tax is due whether or not the fund distributes cash. Many QOFs, especially development projects, do not distribute enough by year 5 to cover it.

Sources

Every numbered note in this guide links to the source below.

  1. 1.Office of the Law Revision Counsel, U.S. House of Representatives, “26 U.S.C. Subchapter Z: Opportunity Zones (§§1400Z-1 and 1400Z-2),” 2025. uscode.house.gov
  2. 2.California Franchise Tax Board, “2023 Instructions for Schedule D (541), Capital Gain or Loss,” 2023. ftb.ca.gov
  3. 3.Internal Revenue Service, “Notice 2026-40, Transitional Guidance on Qualified Opportunity Zones,” 2026. irs.gov
  4. 4.Seyfarth Shaw, “7 Key Changes to the Qualified Opportunity Zone Incentive Under the One Big Beautiful Bill Act,” 2025. seyfarth.com
  5. 5.Legal Information Institute, Cornell Law School, “26 CFR 1.1400Z2(c)-1, Investments held for at least 10 years,” n.d. law.cornell.edu
  6. 6.Novogradac, “Interpreting and Completing OZ-Related Tax Forms,” n.d. novoco.com
  7. 7.RSM US, “The OBBBA rekindles opportunity zones: What it means for real estate,” 2025. rsmus.com
  8. 8.Willkie Farr & Gallagher, “One Big Beautiful Bill Act Extends Tax Incentives for Qualified Opportunity Zones,” 2025. willkie.com
  9. 9.Internal Revenue Service, “Enhanced tax incentives for Qualified Opportunity Zone investments in rural areas,” 2025. irs.gov
  10. 10.CohnReznick, “Opportunity Zones mandatory gain inclusion guide,” n.d. cohnreznick.com
  11. 11.BDO, “One Big Beautiful Bill Act Expands 100% Depreciation Expensing Opportunities,” 2025. bdo.com
  12. 12.Dentons, “The Qualified Opportunity Zone Program Offers New Incentives for Data Center Projects,” 2026. dentons.com

Model your gain

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This website is for general information only. It is not an offer to sell, or a solicitation of an offer to buy, any security. Any offering will be made only through confidential offering documents, to eligible investors, where permitted by law. Opportunity Zone tax benefits depend on each investor's circumstances and on rules that can change; consult your own tax and legal advisers.

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