Deferring Capital Gain with QOF Investments
QOF investments offer taxpayers immediate tax savings—but more importantly, they also offer potentially extraordinary savings to long-term investors.
QOFs are corporations or partnerships that are organized to invest in qualified opportunity zones (QOZ). The IRS has designated 8,764 low-income tracts as QOZs.
Taxpayers may defer capital gains by rolling them over into a QOF within 180 days. The taxpayer generally must recognize the gain when the QOF investment is sold or exchanged or, if earlier, on December 31, 2026. However, some of the gains are not taxed at all if the taxpayer holds the investment for at least five years.
Longer-term investors may realize an even bigger bonanza. A taxpayer who holds a QOF investment for at least 10 years may elect to avoid federal income tax on the appreciation in the investment that is attributable to the deferred gain. The taxpayer’s basis in the appreciation is also stepped up to fair market value when the investment is sold or exchanged.
This combination of immediate deferral of gains, plus potentially tax-free long-term gains, is why many taxpayers think QOF investments are worth the paperwork.
A taxpayer who disposes of a QOF investment should be able to get most of this information from Form 1099-B, Proceeds from Broker or Barter Exchanges, that the QOF (or a third party) should provide. Part III for Form 8997 also includes a box for taxpayers to check if they did not receive a Form 1099-B.