Tax Planning Strategies with Qualified Opportunity Zones

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Author: Nick Hudson, Wealth Strategist, VP

Key takeaways:

• Qualified Opportunity Zones (QOZ) can help defer, reduce and potentially eliminate capital gains taxes under certain conditions.
• New 2025 legislation makes QOZs a renewed tax planning strategy for business owners preparing for a sale or liquidity event.
• QOZ investing requires long-term commitment and careful coordination with tax and financial advisors to maximize benefit and manage liquidity and tax implications.

Using Qualified Opportunity Zones to build a tax-efficient exit strategy

For business owners planning a sale, one of the most common concerns is the potential income tax liability associated with the transaction. With any business sale, a significant portion of the proceeds may be subject to capital gains taxes. As a result, business owners often seek strategies designed to help mitigate taxes and preserve wealth. Thoughtful pre-transaction planning can significantly improve potential tax outcomes.

One strategy that may be worth considering is the use of Qualified Opportunity Zones (QOZs). Originally established under the Tax Cuts and Jobs Act of 2017, QOZs were designed to incentivize investment in designated underserved communities. Qualified investments into these zones provided several key benefits to investors, many of which are no longer available or scheduled to sunset at the end of 2026. However, with the passage of the One Big Beautiful Bill Act in 2025, the QOZ program was extended and modified, creating a renewed planning opportunity for individuals considering this tax-saving strategy.

Fundamentals of Qualified Opportunity Zones

At a high level, taxpayers are permitted to reinvest eligible gains¹ into a Qualified Opportunity Fund (QOF), which then deploys this capital into investments within the approved zones. Under the new rules introduced in 2025, taxpayers who reinvest gains into QOFs after December 31, 2026, may be eligible for the following tax benefits: ²

• Deferral of capital gains: Investors may defer payment of taxes on capital gains by reinvesting those gains into a QOF. The deferred gain is recognized on the earlier of the fifth anniversary of the investment into the QOF, or the disposition of the QOF by the investor.
• Reduction of deferred gains: In addition to the five-year deferral, investors may receive a partial reduction of the deferred gain. If the investment in the QOF is held for a minimum of five years, the investor is eligible for a 10% basis step-up. A special 30% basis step-up is available for investments in Qualified Rural Opportunity Funds, which invest 90% or more of their assets in qualified rural areas.
• Tax-free appreciation: If the QOF investment is held for a minimum of 10 years, any appreciation in the investment may be excluded from federal capital gains taxes upon disposition of the investment. Investors may continue to benefit from this exclusion for up to 30 years. If the investment is held beyond 30 years, the basis is stepped up to the fair market value at the 30-year mark. As a result, appreciation occurring after that point is subject to capital gains tax upon disposition.

Example:

• Sally, a business owner, sells her company in 2027 and realizes a $50 million capital gain. She elects to reinvest $5 million of the gain into a QOF within 180 days, deferring tax on that portion, while paying tax on the remaining $45 million for the 2027 tax year.
• After holding the QOF investment for five years, Sally receives a 10% step-up in basis, reducing her deferred gain from $5 million to $4.5 million. This amount is recognized and taxed at that time. In this example, we assume Sally pays the tax using assets held outside of the QOF.
• Sally continues to hold the investment long-term. At the 10-year mark, the QOF investment has grown from $5 million to $10 million. If sold at that time, the $5 million of appreciation would be eligible for full exclusion from federal capital gains tax.
• Instead, Sally continues to hold the investment. At the 30-year mark, the investment has grown to $20 million, and her basis is stepped up to that amount.
• Five years later, she sells for $25 million, resulting in a $5 million taxable gain, representing appreciation after the 30-year mark.

What business owners should know before investing in a Qualified Opportunity Zone

While the tax incentives outlined above are compelling, Qualified Opportunity Zones are complex and require careful planning. As part of a broader business transition planning strategy and wealth planning for business owners, there are several important considerations that potential investors should evaluate with their team of advisors before making an investment.

• Understand the 180-day reinvestment window: Perhaps the most critical component of qualifying for QOZ tax benefits is timing. Prospective investors must reinvest eligible gains into a QOF within 180 days of realizing the gain. In most cases, this period begins on the date of the sale of stock, real estate or other assets.

For business owners, the 180-day clock often begins upon the sale of equity in the business or the sale of business assets. However, there are special rules that apply to business owners of pass-through entities. When gains are reported via Schedule K-1 from a partnership or S corporation, such as following the sale of a business asset, a business owner may choose to begin their 180-day reinvestment window on one of the following dates³:

1. The last day of the entity’s tax year (default)
2. The date the gain was realized at the entity level
3. The due date for the entity’s tax return (without extensions)

This flexibility can provide valuable planning opportunities for pass-through entity owners, offering them greater optionality and potentially more time to identify and evaluate a QOF investment.

For business owners planning a sale, the 180-day window provides an opportunity to align the timing of a potential transaction with a reinvestment into a QOF, to qualify for associated tax benefits.

• QOFs as an investment: Qualified Opportunity Fund investments are typically illiquid and often involve investments in real estate development or other business opportunities in less established markets. The combination of illiquidity and the long-term holding periods required to fully realize tax benefits may not be appropriate for every investor.

As a result, QOZ investments are better utilized as one component of an investor’s overall strategy, rather than the entirety of an investment plan. Rather than allocating the entirety of a gain into a QOF, it is often advisable to dedicate a portion of the proceeds to QOFs while maintaining a diversified portfolio across other asset classes.

• Liquidity needs: QOZ strategies are generally better suited for investors with sufficient liquidity outside of the reinvested gain. Access to liquidity can allow the investor to meet the eventual tax liability on the deferred gain typically recognized at the five-year anniversary of the investment or upon an earlier disposition, without needing to liquidate their QOF investment. This, in turn, may allow the investment to be held long enough to meet the ten-year holding period required to exclude appreciation of the QOF investment from capital gains taxes.
• State taxes: Not all states conform to the federal QOZ rules, which may result in situations where an investor may defer federal taxes but owe state taxes in the year of the sale. It is important to work with qualified tax professionals who are familiar with tax law in your state of residence.

Final thoughts

The sale of a business is a significant milestone that is often the result of years, if not decades, of dedication and hard work. While the associated tax impact can be meaningful, strategies such as Qualified Opportunity Zones may offer a way to reduce that burden while providing an opportunity to reinvest capital for future growth.

With the updates introduced in 2025, QOZs have regained relevance as a planning tool for business owners evaluating an exit. However, their effectiveness depends on early planning, proper timing and alignment with one’s financial goals. Utilizing QOZs as a tax mitigation strategy is most effective when thoughtfully integrated into the broader transaction and wealth planning process. Coordination with experienced tax, legal and financial advisors is essential to determine whether this strategy is appropriate and to execute it effectively.

For business owners who are considering a business sale or have recently completed one, this is an important time to evaluate how strategies like QOZs may fit within your broader plan. Engaging your wealth advisory team early can help you maximize opportunities and make more informed decisions about what comes next.