The Tax Cuts and Jobs Act of 2017 (TCJA) is the largest overhaul of the United States tax code in a generation. There has been much reporting about the change in the tax rates, the new benefits available for business taxpayers, and the advantages and disadvantages of many of the changes to existing law. One of the more under-reported benefits, however, arises from something that is new with the TCJA – the concept of Qualified Opportunity Funds (QOFs). To the educated taxpayer, QOFs can mean potential tax savings and the chance to invest in the future of some of America’s most needy areas.

What is a Qualified Opportunity Fund?

A QOF is any investment vehicle that is organized as a corporation or a partnership for the purpose of investing in Qualified Opportunity Zone (QOZ) property (other than another QOF) that holds 90% of its assets in QOZ property. QOZ property includes investments in QOZ stock, QOZ partnership interest, and QOZ business property. This encompasses investments in new or substantially improved tangible property, including commercial buildings, equipment, and multifamily complexes, with a common requirement that such investments must be made in QOZs.

Defining America's Qualified Opportunity Zones

Under the TCJA, Qualified Opportunity Zones (QOZs) are United States Census Tracts that are characterized by low-income communities and families below the poverty line. Approximately half of the census tracts in the United States are considered QOZs, and the federal government is incentivizing investment in these communities.

How Does a QOF Investment Work?

The TCJA allows for the deferral of gain recognition from capital gain transactions, provided that the gain is reinvested in a QOF within 180 days of the sale. The gain is deferred until the earlier of the date in which the investment in the QOF is sold or Dec. 31, 2026. Finally, if the QOF investment is held for at least 10 years, the taxpayer can elect to increase the basis of the property to its FMV on the date that is sold or exchanged. In this case, any appreciation of the QOF investment above the taxpayer’s initial investment of gain will not be subject to tax.

Are Qualified Opportunity Funds Right for You?

If you are an investor or have recently had a transaction which resulted in a large capital gain to you, or if capital gains are a large percentage of your income, Qualified Opportunity Funds can be a great way to save money on taxes and revitalize deprived communities. We at MRPR are ready to assist you. You can contact us for more details.