Save Taxes by Reinvesting Business Sale Proceeds into Opportunity Zones

Example: Turning a $7.42 Million Tax Bill into a Tax-Free Investment

Suppose you sell your business in 2025 and realize a $20 million capital gain. Normally, you’d owe about $4 million (20%) in federal capital gains tax, $760,000 (3.8%) in net investment income tax, and roughly $2.66 million (13.3%) to California, assuming you’re in the top tax brackets. That’s a total of $7.42 million, or about 37.1% of your gain.

Instead, you invest that $20 million gain into a Qualified Opportunity Fund (QOF), a partnership or corporation that builds housing, commercial properties, or operating businesses in designated Opportunity Zones.

Here’s how you save:

You defer paying the $7.42 million tax for five years. After holding your investment for five years, you receive a 10 percent step-up in basis, permanently eliminating $742,000 of the taxable gain. You now owe $6.678 million instead of $7.42 million when the deferred tax becomes due.

And if you hold the QOF investment for at least 10 years, any future profits from that investment are completely tax-free—no capital gains tax, no depreciation recapture. You’ve effectively turned the sale of your business into a long-term, tax-free growth opportunity.

What’s an Opportunity Zone?

Opportunity Zones are areas designated by the federal government to attract private investment in underdeveloped communities. When you reinvest your capital gains into a Qualified Opportunity Fund (QOF)—a partnership, corporation, or LLC that develops real estate or operates businesses in these areas—you qualify for substantial federal tax incentives.

There are two versions of this program: QOZ 1.0 (2018–2026) and QOZ 2.0 (starting 2027).

QOZ 1.0 (2018–2026): The Original Program

Created by the 2018 Tax Cuts and Jobs Act, the first Opportunity Zone program designated over 8,700 zones across the country. Investors could defer paying tax on capital gains until December 31, 2026, and if they held their investment for 10 years, they paid no tax on any future appreciation.

Early investors also received a 10–15 percent step-up in basis, reducing their taxable gain. Although that benefit ended after 2021, investments made before the end of 2026 can still benefit from long-term, tax-free growth through 2047.

QOZ 2.0 (Starting 2027): The Permanent Update

The One Big Beautiful Bill (OBBBA) made the Opportunity Zone program permanent, with new rules beginning January 1, 2027.

Key changes include:

New zones will be selected every 10 years under stricter criteria, reducing the total number by about 25 percent.

Capital gains deferral now lasts five years from the investment date, rather than ending on a fixed date.

Investors receive a 10 percent step-up in basis after five years, reducing their taxable gain by that amount.

Appreciation remains tax-free for up to 30 years, after which new gains become taxable.

Bigger Incentives for Rural Investments

The OBBBA also created Qualified Rural Opportunity Funds (QROFs) for investors focusing on rural areas. These funds offer enhanced benefits. Investors receive a 30 percent step-up in basis after five years, eliminating nearly one-third of their taxable gain. The improvement requirement for existing properties is also reduced to 50 percent of the property’s original basis, compared with 100 percent in other zones.

The “Dead Zone” Before 2027

From now until the end of 2026, investors can still use the old QOZ rules, but any deferred taxes will be due in 2027, and there’s no basis step-up. Because of that, many investors are waiting until 2027, when the new and improved QOZ 2.0 rules take effect.

If you realize gains late in 2026, you can still invest in early 2027 and qualify under the new program.

Summary

Selling your business can create a huge tax bill, but reinvesting those gains into a Qualified Opportunity Fund allows you to defer your capital gains taxes for five years, reduce your taxable gain by 10 percent (or 30 percent for rural investments), and eliminate taxes entirely on future appreciation after 10 years.

In simple terms, sell your business, reinvest the gains into an Opportunity Zone fund, and you may never pay capital gains tax on that money again.