Avoiding taxes and depreciation recapture by conducting a cost segregation study after purchasing and improving a real property such as 249 56th Street Brooklyn in the Sunset Park qualified opportunity zone (QOZ)

When opportunity zones (OZs) debuted in 2017 with the fantastic promise of avoiding (not evading) capital gains tax completely, everybody’s ears perked up … but there were expiration dates … and too many hoops to jump through for tax relief.

That was then, this is now … let’s call OZs in 2017 – OZs version 1.0 … and OZs in 2026 and beyond – OZs version 2.0. They are no longer a temporary incentive or a gimmick – the 2017 program had to be renewed in 2026, and it was renewed – Congress voted it in, and now the IRS has made OZs “as permanent as a 1031 like-kind exchange” – for more FAQ OZ info on www.irs.gov – click here

OZ 2.0 maps now refresh every 10 years, giving investors a predictable, multi-decade horizon for the first time and not just … invest your gain … wait … and then exit scenario.

OZs version 2.0 has two (2) major improvements …

• 1 – Permanent 100% bonus depreciation. The moment a project is signed off, you write off the entire building against taxable income. Paper loss, day one. And unlike traditional real estate depreciation, there is no recapture when you sell. That loss stays yours forever.
• 2 – Flexible exit window. Hold for ten (10) years, and your basis steps up to fair market value (FMV). All appreciation exits tax-free and no capital gains. No depreciation recapture, and you don’t have to exit at year 10 – your election to exit stays open through year 30 – you choose when to exit based on market conditions, not an arbitrary, “blinders on” deadline.

The checklist is as follows : 

• Take a capital gain (from stocks, a business sale, or crypto) – read that again – unlike a 1031 exchange, this process works for stocks, business sales, crypto, etc … Any capital gain can be used.
• Invest that gain into a designated “Opportunity Zone.” Such as purchasing cash-flowing 249 56^th Street between 2^nd Ave and 3^rd Ave in Sunset Park, Brooklyn, NY 11220 – currently used as an auto repair shop – expired commercial lease – no residential tenants – no basement – 3,506 buildable square feet per PropertyShark. For more information – click here. 

• Improve the property. If you follow the rules and hold for 10 years, the federal government grants you tax immunity on the backend. But the real magic happens when you combine your improved property with a Cost Segregation Study.

This is the “Power Play” … (yes, we just finished watching Ice hockey in the Winter Olympics) …

In a standard development deal, you can depreciate the building over 27.5 years. You get a small tax deduction every year. It is boring. It is slow. Is there a faster way? …. yes … hire an engineering firm to perform a Cost Segregation Study. They walk through the building. They identify components that do not last 27.5 years. Flooring. Lighting. Cabinets. Landscaping. … There is a difference between how long the cabinets actually last … and when the IRS lets you write them off.

The tax code allows us to write these items off immediately or on a timeline much quicker than 27.5 yrs … there is even an FAQ section on the IRS website to talk you through it – it’s only 348 pages long – see PDF link here

Come on now … you didn’t think that the IRS was make it easy for you to avoid taxes and DIY without hiring some professionals along the way. Now that would really be … too good to be true! 

Now we depreciate the asset. Whatever amounts can be legally written off using the guidelines above, we will call “bonus depreciation.” If there are any investors or qualified REPS, they can use this loss to offset other passive income. It crushes their tax bill in whatever tax year they develop 249 56^th Street. The current commercial tenant is paying $ 3,200pm in rent (expired lease).

Take your time … collect the rent while you are figuring out your development plans.

In a normal real estate deal, these write-offs come back to bite you. The IRS calls it “Depreciation Recapture.”

When you sell a building that is not located in a QOZ, the IRS looks at all those depreciation deductions you took on every tax return.

OZ rules change the equation in your favor.

Remember, the government wants investment dollars to be used in areas that have missed out in recent decades … Congress is hoping for “a rising tide that lifts all boats” as JFK was wont to say.

If you hold an OZ asset for 10 years, your cost basis steps up to fair market value when you sell.

That means two things: You pay $0 Capital Gains Tax on the profit, and you pay $0 Depreciation Recapture tax.  

You get the tax break upfront.

You kept the cash flow in the middle.

You keep all the profit at the end.

This is not a loophole.

It is a congressional incentive.

The government wants housing built in these chosen zones.

They offer tax-free profits to get it.

To see all of the NYC opportunity zones available for your investment dollars – click here 

So who else is investing ? … public and private investors have already pledged billions  … and the transportation infrastruture is already in place … it’s not like you are waiting for a train or an airport to be built … there are two (2) subway stations – one ADA accessible within a few blocks … ferries … BQE overhead … billions and billions of NEW dollars are being invested within a mile of this one-story, commercial property … to watch a narrated Smith Hanten video tour – click here.

Read some more … don’t take our word for it … within a half mile of 249 56th Street, AI-powered firms are flocking to Industry City, South Brooklyn Marine Terminal, BATWorks climate innovation hub, and MADE Bush Terminal (formerly Bush Terminal).

Full disclosure : Smith Hanten Properties LLC is a licensed real estate brokerage operating from the same block on Smith Street, Brooklyn for 45 years (Est. 1981) – we are not engineers, attorneys, accountants, or any combination of the three so none of this post should be taken as professional tax or investment advice – so how can we help you ?

…. we are proven deal-makers, solution providers, and wealth creators using the medium of bricks and mortar/land and we’ve just exclusively listed for sale 249 56^th Street in Sunset Park Brooklyn NY 11220 -– we question everything in our business and we think you & your business partners should as well – if you are investing millions – it is prudent to pay many thousands of dollars for written advice from a licensed professionals in one or more of the disciplines listed above.

Best of luck in all of your investments in 2026.

Thanks for reading.