New Tax Incentives through Qualified Opportunity Funds
Recent tax reform has provided business owners with many new and unique opportunities. One of the more unique sections of the new code relates to Qualified Opportunity Funds (QOF).
A QOF is an investment vehicle which provides the opportunity to defer the taxation of long-term capital gains. The QOF must hold 90% of its assets in areas that have been designated as a Qualified Opportunity Zone.
This section of the code is still fairly new and there are still a lot of questions that need to be addressed, but the following is some of what we do know about QOF;
- The temporary gain deferral election is made when a taxpayer reinvests gains within 180 days from the date of the sale or exchange.
- The election can only be made once in regard to a specific transaction and cannot be made for any transaction after December 31, 2026.
- The taxpayer can defer the gain until either the investment in the QOF is sold or December 31, 2026, whichever happens first.
- The investment in the QOF has zero basis in the beginning, but can be increased for;
- 10% of the deferred gain, if the investment is held for five years,
- An additional 5% (total of 15% of the deferred gain) if held for more than seven years, and
- For any post-acquisition appreciation, the basis is stepped up to the FMV, if held for ten years. In other words, if held for ten years, no gain will be recognized in regard to the appreciation of the QOF.
The IRS has recently issued proposed regulations and revenue rulings addressing many of the questions in regard to the QOFs, but there are still many items that need further guidance.
You should consult your tax advisor with any questions you may have in regard to QOFs.