Taxpayers who invest in Qualified Opportunity Zone property through a Qualified Opportunity Fund can temporarily defer tax on the amount of eligible gains they invest. How It Works You can defer tax on eligible gains you invest in a Qualified Opportunity Fund until you have an inclusion event or by December 31, 2026, whichever is earlier. Eligible gains include both capital gains and qualified 1231 gains, but only if the gains are: Recognized for federal income tax purposes before January 1, 2027 Not from a transaction with a related person In general, qualified 1231 gains are gains reported on Form 4797, Sales of Business Property. You can transfer property other than cash as an investment in a Qualified Opportunity Fund. However, a transfer of non-cash property may result in only part of the investment being eligible for Opportunity Zone tax benefits (that is, a qualifying investment). Specifically, the amount of gain you defer is limited to the basis of the contributed property, even if you transfer a property with a greater value. Filing Requirements You must meet annual investor reporting requirements if you hold a qualifying investment in a Qualified Opportunity Fund at any point during the tax year. You must file annually Form 8997, Initial and Annual Statement of Qualified Opportunity Fund (QOF) Investments with your timely filed federal tax return (including extensions). Timing of Investments To defer tax on an eligible gain, you must invest in a Qualified Opportunity Fund in exchange for equity interest (not debt interest) within 180 days of realizing the gain. In general, if you don’t defer the gain, the gain would be recognized for federal income tax purposes the first day of the 180-day period. Tax Benefit The amount of time you hold the Qualified Opportunity Fund investment determines the tax benefit you receive. When you make an election to defer the gain, the basis in the Qualified Opportunity Fund investment becomes zero. The Qualified Opportunity Fund basis increases the longer you hold your interest in the Qualified Opportunity Fund. Tax Benefit on Temporary Deferral If you hold your investment in the Qualified Opportunity Fund for at least 5 years, your basis (the amount of your investment) will increase by 10% of the deferred gain. If you hold your investment in the Qualified Opportunity Fund for at least 7 years, your basis (the amount of your investment) will increase by an additional 5% of the deferred gain. Adjustment to Basis After 10 Years If you hold your investment in the Qualified Opportunity Fund for at least 10 years, you may be able to permanently exclude gain resulting from a qualifying investment when it is sold or exchanged. The exclusion occurs if you elect to increase the basis of your Qualified Opportunity Fund investment to its fair market value on the date of the sale or exchange. How to Elect the Eligible Gain Deferral You must invest the eligible gain in a Qualified Opportunity Fund in exchange for an equity interest in the Qualified Opportunity Fund (that is, the qualifying investment). Once you have done this, you can elect the deferral on Form 8949, Sales and Other Dispositions of Capital Assets, for the taxable year in which the gain would be recognized if you didn’t defer it. Also, complete and submit Form 8997, Initial and Annual Statement of Qualified Opportunity Fund (QOF) Investments. To elect to defer tax on a gain if you already filed your federal income tax return, file an amended return or an Administrative Adjustment Request (AAR), as appropriate, with a completed election on Form 8949. Review the guidance provided on Form 8949 Instructions for reporting eligible gains. Deferred Gain Inclusion An inclusion event, in general, is an event that reduces or terminates your qualifying investment in a Qualified Opportunity Fund. Refer to Investing in Qualified Opportunity Funds - Final Regulations (TD 9889)PDF for a list of events, which includes but is not limited to sales, gifts or liquidation of the Qualified Opportunity Fund. To determine how much deferred gain to report at the time of inclusion: Take the Deferred Gain or the fair market value of the Qualified Opportunity Fund Investment, whichever is less Subtract the basis in the Qualified Opportunity Fund Investment Use the total as the Reportable Deferred Gain Investment Basis Considerations If you sold or exchanged your investment in a Qualified Opportunity Fund during the tax year, you must report the amount of gain or loss. To do this, file Form 8949, Sales and Other Dispositions of Capital Assets. You need to know your basis to figure any gain or loss on the sale or other disposition of the property. When you elect to defer an eligible gain and invest in a Qualified Opportunity Fund, the basis in the Qualified Opportunity Fund investment is zero plus the 5 to 7-year basis adjustments, if applicable, and all other allowable increases and decreases. You must keep accurate records that show the basis and, if applicable, adjusted basis of your property. Find more information on tax rules that apply when disposing of a property in Sales and Others Dispositions of Assets, Publication 544. Frequently Asked Questions Opportunity Zones Frequently Asked Questions: Investors Forms and Publications Form 4797, Sales of Business Property Form 8949, Sales and Other Dispositions of Capital Assets Form 8997, Initial and Annual Statement of Qualified Opportunity Fund (QOF) Investments Sales and Other Dispositions of Assets, Publication 544 Regulations and Guidance Opportunity Zones Regulations and Guidance Notice 2020-39, Relief for Qualified Opportunity Funds and Investors Affected by Ongoing Coronavirus Disease 2019 PandemicPDF Tax Cuts And Jobs Act (TCJA) Opportunity Zones Webinar
