With Opportunity Zones attracting considerable attention and, more importantly, significant capital, many view this as one of the greatest investment opportunities available today. Investments in Opportunity Zones are made through Qualified Opportunity Funds, which are funded by investors’ gains from previous investments. The tax on those gains is deferred and then reduced by 15% if kept in the QOF for 7 years. Further, capital gains earned in a QOF will be completely tax free if the initial funds are retained for the full 10 years. Despite the rush to participate in OZs, they remain relatively new as investment vehicles, and the specifics of the compliance rules and regulations for QOF are still being hammered out. We look to the IRS as it regularly updates its position on various QOF topics.
How is the gain on the sale of stock deferred?
An election to defer the gain is made on the tax return for the year the tax would have been due had the election not been made by completing and attaching Form 8949.
Can an election to defer gain be made for a tax year after that year’s return has been filed?
Yes. It will be necessary to file an amended return by filing Form 1040-X and attaching Form 8949.
If a gain is deferred based on an investment in a QOF but the QOF dissolves or the investment is transferred before the end of the deferral period, what should be done?
The deferral period is deemed to have ended when the QOF dissolved or the investment was transferred. The deferred gain must be reported on that year’s tax return on Form 8949.
Investors do, however, have an opportunity to re-invest those funds into another QOF in order to continue to defer their gains.
Are gains from Section 1231 transactions eligible to be deferred if properly invested in a QOF?
Yes, as a long-term capital gain, an election can be made to defer Section 1231 gains under opportunity zones rules.
How is a Qualified Opportunity Fund established?
A QOF is an investment vehicle organized for the purpose of investing in QOF property, which must be within Qualified Opportunity Zones, as designated by the IRS. A QOF self-certifies by filing either a partnership or corporation federal income tax return including Form 8996, Qualified Opportunity Fund.
Despite the potential upside of investing in opportunity zones, it is not for everyone. The real benefits are for the investor who is seeking a long-term commitment, which may or may not fit with your needs. Primior understands the importance of crafting the right investment plan for each individual investor based on specific needs, circumstances and goals. Contact us today for an evaluation of where you are in your investment journey.