Assumption Calculator 1:
The above calculations are done using the following assumptions. A capital gains tax rate of 23.8% is used and is assumed to be in effect for the entire timeframe indicated. The tax rate includes the highest federal capital gains rate of 20% and the 3.8% net investment Income tax that applies to taxpayers in certain circumstances. State taxes are not considered as part of this calculation. The expected annual return selected is used to calculate a compounded return on an annual basis for the holding period indicated and is the same rate for all scenarios being compared. The return indicated is a simple return and is not considered to be an internal rate of return as it does not take into account the time value of money. It is also assumed that the investment is made on or prior to December 31, 2019 and held for the time period indicated. The expected annual return is used only as an example and is not intended to represent expected performance of any specific investment.
The assumption for the traditional stock portfolio is that tax is paid at the time the gain is realized using the above mentioned 23.8% capital gains tax rate. The after-tax remainder is assumed to be invested and held for the time period indicated, and then sold, with tax being paid on additional gains realized at a rate of 23.8%.
Five year scenario:
The gain calculation on the Opportunity Zone Fund investment after five years is done under the assumption that the full realized gain for the specified amount is rolled into the Opportunity Zone Fund and that tax is initially deferred. The investment gain is compounded annually at the indicated rate selected and after five years the investment receives a 10% step-up in basis. At that point the Opportunity Zone Fund investment is assumed to be sold and 90% of the deferred gain is taxed at 23.8%, while the additional appreciation that has compounded over five years is also taxed at 23.8%.
Numerical example: Assume a capital gain of $1,000,000 from selling XYZ stock. After 5 years, the tax due is: 23.8% x $900,000 = $214,300 ; better than initial $238,000 due without Opportunity fund, a saving of $23,800. Investors are also benefiting a free loan over that period of that amount from the IRS: $238,000 are working for the period before taxes being paid.
Seven year scenario:
The gain calculation on the Opportunity Zone Fund investment after seven years is done under the assumption that the full realized gain for the specified amount is rolled into the Opportunity Zone Fund and that tax is initially deferred. The investment gain is compounded annually at the indicated rate selected and after seven years the investment has received a 15% step-up in basis. At that point the Opportunity Zone Fund investment is assumed to be sold and 85% of the deferred gain is taxed at 23.8%, while the additional appreciation that has compounded over seven years is also taxed at 23.8%.
Numerical example: Assume a capital gain of $1,000,000 from selling XYZ stock. After 7 years, the tax due is: 23.8% x $850,000 = $202,300 ; better than initial $238,000 due without Opportunity fund, a saving of $35,700. Investors are also benefiting a free loan over that period of that amount from the IRS: $238,000 are working for the period before tax being paid.
Ten year scenario:
The gain calculation on the Opportunity Zone Fund investment after ten years is done under the assumption that the full realized gain for the specified amount is rolled into the Opportunity Zone Fund and that tax is initially deferred. The investment gain is compounded annually at the indicated rate selected and after seven years the investment has received a 15% step-up in basis. As of December 31, 2026, the deferred tax is due and 85% of the deferred gain is taxed at 23.8%. For the remaining time period of the ten-year hold, the investment returns continue to compound at the selected annual rate and after the investment has been held for ten years, the investment is sold, and no tax is due on the additional appreciation that has compounded over the ten-year period.
Numerical example : same calculation as 7 year scenario.