Client Profile
| Industry | Real Estate Development (Mixed-Use) |
| Project Value | $5,200,000 new construction |
| Entity Type | QOZ Fund LLC |
| State | Virginia |
| Key Metric | $780K capital gain invested in QOZ |
| Tax Savings | $195,000 |
The Problem
This developer had realized a $780,000 capital gain from the sale of a commercial property and was facing approximately $185,000 in combined federal capital gains tax and NIIT. The developer was also planning a new mixed-use construction project in a designated Qualified Opportunity Zone but had not connected the capital gain to the OZ incentive.
The developer's prior advisor had not explored the QOZ program under IRC §1400Z-2, had not considered cost segregation on new construction, and had not evaluated the Section 179D energy deduction.
AE Tax Strategy
1. Qualified Opportunity Zone Fund Under IRC §1400Z-2
We formed a QOZ Fund LLC and invested the $780,000 capital gain within the 180-day window. This deferred the entire gain. If held 10+ years, any appreciation is permanently excluded under IRC §1400Z-2(c). Immediate deferral saved approximately $185,000.
2. Cost Segregation on New Construction Under IRC §168
The cost segregation study reclassified $1,260,000 of the $4.2 million depreciable basis to accelerated recovery periods. Combined bonus depreciation produced approximately $78,000 in additional tax savings.
3. Section 179D Energy Efficient Commercial Building Deduction
The building's high-efficiency design qualified for the full 179D deduction of $5.65 per square foot on the 8,400-square-foot commercial portion, producing approximately $17,000 in additional tax savings.
Before & After Comparison
| Category | Without Planning | With QOZ + Cost Seg + 179D | Benefit |
|---|---|---|---|
| Capital Gains Tax (Current Year) | $185,000 | $0 (deferred) | $185,000 |
| Cost Segregation Year 1 | $0 | $78,000 | $78,000 |
| Section 179D Deduction | $0 | $17,000 | $17,000 |
| Total (Deferral + Savings) | $185,000 owed | $95K saved + $185K deferred | $195,000+ |
Key Takeaways
- Qualified Opportunity Zone investments allow capital gains deferral and, if held 10+ years, permanent exclusion of appreciation.
- New construction projects should always be evaluated for cost segregation — accelerated recovery periods apply equally to new buildings.
- Section 179D provides a meaningful per-square-foot deduction for commercial buildings meeting energy efficiency standards.
- Layering multiple incentives (QOZ + cost segregation + 179D) on a single project can materially change the after-tax return on investment.