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As Congress debates a potential revival or overhaul of the Opportunity Zone (OZ) program, taxpayers sitting on eligible capital gains face a key strategic question: wait for a new program or take action now under the existing framework? For many, the prudent move is clear: invest into a “captive” Qualified Opportunity Zone Fund (QOF) in 2025 (or 2026).
First, let’s define what a “Captive” OZ Fund is. Then, let’s explore which gains are eligible for reinvestment and the timeline for reinvesting into an OZ Fund.
A “Captive” OZ Fund refers to a fund established by an individual, family, or small group of taxpayers for the purposes of managing their own project or projects. Such projects can be either real estate projects or operating businesses located in one or more of the 8,764 current census tracts throughout the U.S. and U.S. Territories.
An eligible capital gain can be either a short-term or long-term capital gain recognized by a U.S. taxpayer. Eligible gains can arise from the sale of real estate, a business, stocks and bonds, cryptocurrency, most intangible assets and many other assets.
The start of the 180-day reinvestment period generally begins on the date of the sale of the underlying capital asset(s). The sale date is included, and the reinvestment period generally ends on the 179th day following the sale date, regardless of whether that deadline falls on a holiday or weekend.
There is a taxpayer-friendly extension of this period in cases where the gain will be reported on a K-1. These 2024 K-1 recipients have until September 11, 2025, to fund their OZ Funds. A taxpayer with a gain reported by an LLC/Partnership, S Corporation, Estate or regarded Trust can elect to start the reinvestment period on:
It should be noted that this third election option can get extended further in cases where there has been a Presidentially declared disaster. Most notably the January 2025 Los Angeles wildfires resulted in a Presidential-designated Disaster classification for all Los Angeles County residents, as well as other taxpayers with financial records within Los Angles County. Therefore, taxpayers with business interests, tax preparers, attorneys and other business or personal advisors may also be eligible for federal and California 2024 tax return filing and 2025 1st-3rd estimated tax payment extensions until October 15, 2025. As a result of this extension, qualifying Los Angeles County taxpayers (and possibly others impacted by federal disasters in other states) do not start the 180-day period for 2024 K-1 capital gains until October 15, 2025.
As reflected above, the OZ program is exceedingly flexible and after transferring funds into the QOF, taxpayers have at least six months to drop 90% of the cash in the QOF into a subsidiary entity (the Qualified Opportunity Zone Business (QOZB)) which then allows the taxpayer and Fund Manager at least another 31 months to identify and invest into OZ real estate or an operating business. Therefore – even without quick Congressional action, taxpayers with certain 2024 and any 2025 capital gains should carefully consider “parking” these funds in a captive OZ Fund in order to start the longer-term investment process.
Congress has been evaluating a number of changes to lengthen the program and improve reporting of the community impact from OZ projects. Most importantly, Congress appears comfortable extending the OZ deferral period from December 2026 to December 2028, which provides significant advantages to taxpayers. A summary of the proposals thus far can be found here and here. Other proposals being advanced include allowing non-capital gains to be invested into QOFs, reducing the Substantial Improvement threshold from 100%, expanding the program to rural areas and incentivizing ship-building and other defense industries.
The following are the key benefits of investing now, rather delaying participation until Congress acts. We anticipate a Congressional tax bill by August at the earliest and possibly as late as December.
One of the primary benefits of the Opportunity Zone program is the potential for complete exemption from capital gains tax on post-investment appreciation, provided the QOF investment is held for at least ten years. By creating and funding a captive QOF in 2025, taxpayers can start that 10-year clock immediately, even if they do not make a real estate or business investment for a few years.
Waiting for Congress to potentially pass new legislation could mean delays of several months, or even into 2026. Even if a new OZ regime is introduced, it will likely come with fresh timelines and more complexity, meaning those who wait may not realize tax-free gains until well into the mid-2030s. Meanwhile, proactive investors will be several years ahead on their holding period.
While the OZ industry is optimistic that Congress will pass an OZ extension and/or an OZ 2.0 new program, there is no guarantee. Many national or world-wide events could derail tax reform and the OZ program. Locking in now will ensure short-term and long-term benefits.
Even though the deferral period for recognizing and paying tax on the original capital gain is down to two years – e.g., the 2024 deferred OZ gain will be reportable no later than December 31, 2026 and the tax will be payable April 15, 2027 – this is effectively an interest-free loan during that period – which can be quite valuable when dealing with gains of millions or tens of millions of dollars.
In addition to the tax reduction for 2024, estimated tax payments for 2025 may be significantly reduced since most taxpayers can avoid the 7% under-estimate penalties in 2025 by paying 110% of their 2024 tax liabilities. Therefore, claiming the 2024 OZ deferral will also save significant estimated tax payments in 2025. The same can happen in 2025 and 2026. Also, with a lower Adjusted Gross Income (AGI) in 2024 this can allow greater deductions on Schedule A and less limitations on other deductions and credits.
A captive QOF, one that is wholly owned and managed by the taxpayer (or a family office), offers full control over the investment process, timeline, and asset selection. Rather than waiting passively for potential legislative changes, investors can deploy capital in 2025 into tangible projects or operating businesses that can hopefully begin to appreciate immediately. With current high interest rates, tariff uncertainty and high construction costs, there are some buying opportunities for investors that may not be there later this year or next. In addition, the passage of a new OZ program will likely spike future OZ property values, so an earlier acquisition may be wise. At a minimum, having your cash sitting in a QOZB for future acquisitions will put investors in the best position to execute quickly.
This early deployment can result in a stronger compounding effect, better strategic positioning, and potentially a more advantageous entry point in real estate or business cycles. Delaying investment until a new program is legislated and implemented risks missing out on current opportunities.
The other significant advantage of the captive OZ structure is that the taxpayer and fund can deploy the invested funds into a diversified stock or short-term bond portfolio or other investments and there are sophisticated trading strategies to maximize interim capital losses and minimizing reportable capital gains. Therefore, upon gain recognition on December 31, 2026, or other date, these accumulated capital losses can be used to mitigate the deferred OZ gain.
By investing now, taxpayers can be assured that OZ census tracts the investors are already dealing with will be eligible for their targeted project. Developers may already own land in an existing OZ census tract, and while structuring around the “related Party” rules will be necessary, getting an earlier start on a project to ensure certainty of eligibility is advisable. Investors also have the advantage of being able to see the 7-year history of historical investments into OZ census tracts, thereby allowing “momentum” investing benefits.
High net worth individuals typically generate new capital gains throughout the year – from their investment portfolio, through partnerships and other businesses they have invested in, as well as real estate and other investments they hold. Once the taxpayer has established their captive OZ Fund they have significant flexibility to reinvest these expected and unexpected capital gains into their existing OZ Fund. Therefore, the initial cost of formation can be spread over a few years and over a much larger investment base. Compared to a third-party OZ Fund, which can incur annual fees in the 1.5% to 3% range, plus sharing 15% to 35% of overall appreciation as a result of the promoters’ carried interest allocations, a captive OZ Fund typically will have annual legal and tax fees in the 1% or less range, with no requirement to share profits with other parties.
Here’s where strategic flexibility really shines: under current tax law, if a more attractive Opportunity Zone program is enacted in the near future, taxpayers may have the ability to “re-trigger” their original capital gain through an “Inclusion Event” (such as a sale or cash/ property distribution or a Decertification election by the fund manager) and reinvest it into a newly structured QOF under the new rules. Of course, a taxpayer who invested early in the program and has the benefit of the 5%-15% basis increase/gain reduction, may not want to trigger the gain early.
In other words, creating a captive QOF now doesn’t lock investors out of future programs, it gives them optionality. If the new program offers better terms (e.g., stepped-up basis benefits, longer deferral, or new OZ census tracts), taxpayers can recognize the original gain, pay the original tax, and potentially make a new QOF investment under improved terms—and likely with a new, longer reinvestment timeline.
As an example, let’s assume a taxpayer with a $1M 2024 capital gain timely invests that gain into a captive QOF in early 2025:
Even under the existing program, capital gains invested into a QOF can be deferred until the earlier of December 31, 2026, or the date of an inclusion event. While the 15% and 10% basis step-ups expired in 2021 and 2022, respectively, the deferral benefit still carries significant time value—especially when coupled with the potential for tax-free appreciation on gains within the fund.
The Trump Administration will also be making many other tax changes as part of this bill (mainly taxpayer friendly – see summary here). It is possible certain provisions such as the 2.9% Obamacare tax applicable to some deferred gains could be eliminated resulting in a permanent (vs. deferred) savings. Rates could also decrease, which would further benefit deferral. Of course we all run some risk that certain tax provisions in a new tax bill could increase overall taxes.
For taxpayers with eligible gains from 2024 or early 2025, investing into a QOF still provides nearly two full years of deferral and the possibility of long-term tax-free growth.
Final Thoughts
The Opportunity Zone program may be in a transitional phase, but the current law is still active and advantageous. By forming and investing in a captive QOF in 2025, taxpayers:
In a tax and policy environment filled with uncertainty, taking strategic action now may be the best way to lock in flexibility and maximize benefits later. The window is still open—but it won’t stay open forever.
HCVT has assisted in the formation and management of over 200 OZ Funds. Click here to learn more about the OZ program. For questions or assistance please contact the HCVT OZ Team or call (435) 200-9263.
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