A breakdown of the latest in our world of Accounting
Basics of Qualified Opportunity Zones, Funds and
Tax Deferral of Capital Gains
The Qualified Opportunity Fund (QOF) is a new type of investment which originated from the Tax Cuts and Job Act of 2017 (TCJA).
It created new "Zones" or designations of economically distressed communities, where certain new investments ("Funds") maybe eligible for federal capital gain tax deferral. These Qualified Opportunity Funds (QOF) are being set up to promote investment and economic development of low-income communities across the United States.
The listing of all Qualified Opportunity Zones can be found in the Federal Register at:

Federal capital gains from the sale of real property as well as intangible property such as stocks and other equities can be reinvested into a QOF within 180 days from the date of sale (such as a real estate like-kind exchange). The tax minimization occurs as follows:

  • The amount realized as the capital gain is what is invested into a QOF.
  • These investments should be held as long term.
  • The payment of tax can potentially be deferred until the earlier of the sale date of the QOF or until December 31, 2026, whichever comes first.
  • If this investment is held for at least five years prior to December 31, 2026, there would be a reduction on the deferred capital gain of 10%.
  • If this same investment is held for two additional years beyond that, there is an additional reduction on the deferred capital gain of 5%.
  • For the taxable year ending December 31, 2026, tax on the original deferred capital gain, less 15% of this amount, would be paid. (Assume at a tax rate of 23.8% or 20% on long term capital gain plus the 3.8% Net Investment Income Tax).
  • Finally, if this investment is held for ten years, there would be no capital gain tax when sold.
To give a hypothetical example of the best-case scenario for tax savings...

Let’s assume you sold property and realized a $100,000 long term capital gain on January 1, 2019. You would re-invest the $100,000 into a QOF to be held long-term...

  • In five years, the $100,000 capital gain would be reduced by $10,000 (10%),
  • If it’s held another two years, the capital gain is reduced by another $5,000 (5%)
  • For the taxable year ending December 31, 2026, the federal tax on this deferred capital gain would be $20,230 as opposed to $23,800
  • $20,230 = 23.8% of $85,000 ($100,000 less $10,000, less $5,000)
  • $23,800 = 23.8% of the original $100,000, which would have been due for 2019.
  • When the QOF finally sells after ten years, there is no capital gain tax on the sale. This equates to savings stemming from the time value of money, as well as the investment income being generated from these QOF’s.
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Investments in QOF’s can either be undertaken with purchases from brokers and/or other financial advisers, or you as the investor/taxpayer can set up a QOF as a corporation or a partnership set up solely for investing in qualified opportunity zone property. The new regulations define what is considered qualified opportunity zone property. This includes qualified opportunity zone stock, partnership interest or business property.

If you set up a business entity, as opposed to investing in a pre-existing fund, a new IRS tax form will need to be filed to self-certify as a QOF and it must meet annual reporting compliance. Specific rules and actions need to be followed as well, to ensure the host of qualifications of a QOF are met, and remain as such on an ongoing basis.
As noted above, this is a new investment and business model that was enacted by the TCJA, and not all federal and other tax guidance is final. There may not be tax benefits at the state level if federal conformity is not followed by the state. Due diligence must be exercised before devoting significant time and resources into these investment or self-created funds.

Please contact our office to obtain more information and we would be happy to discuss further.