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Tax & AccountingApril 13, 2020

CCH Tax Talks Explains Qualified Opportunity Funds

By: Wolters Kluwer Tax and Accounting

When the 2017 Tax Cuts & Jobs Act created Qualified Opportunity Zones, investors - and their advisors - quickly became interested in the ramifications of the act. In this episode of Tax Talks by Wolters Kluwer, Mark Luscombe, principal analyst at Wolters Kluwer Tax & Accounting, breaks down the ABCs of QOFs.

Keep reading for highlights from the episode, or listen to the entire discussion on Soundcloud.

What is a Qualified Opportunity Fund?

As part of the 2017 Tax Cuts & Jobs Act, Qualified Opportunity Zones were created as a tax incentive for people to invest in low-income communities, which are designated by the state government. A Qualified Opportunity Fund (QOF) is an entity that invests in property within these zones. The idea is that the investments will spur economic development while also offering benefits to the investors.

Benefits and Drawbacks of Qualified Opportunity Zones

Luscombe explains that one major provision is for deferral of the gain that is realized on the sale or exchange of a capital asset if the gain is invested in a QOF within 180 days after the sale or exchange. In addition, “if you hold the investment in the Qualified Opportunity Fund for at least five years, you get to forgive 10% of the gain. It's not only a deferral; it also has a partial forgiveness provision. Then, while the investment is in the Qualified Opportunity Fund—if it's held there for at least 10 years—any additional gain also is eligible for a permanent exclusion from tax.”

There are a few limitations, however:

  1. To be considered a valid QOF, 90% of the assets of the fund must be invested in a Qualified Opportunity Zone.
  2. With respect to the deferral, the gain on the sale or exchange of a capital asset has to be invested in the QOF within 180 days of the realization of the gain, and that fund then has to invest those assets in a Qualified Opportunity Zone.
  3. As of now, the deferral only lasts until the end of 2026.

Filing Forms to Meet the Reforms

If your firm is working with taxpayers who have invested in qualified opportunities, there are three key forms to know about:

  • Form 8996 is used by the QOF to report their holdings. 
  • Form 8949 is used to make the election to defer the gain by transferring into a QOF.
  • Form 8997 is used by the taxpayer to reflect their initial investments as well as their continuing annual investments in QOFs.

Qualified Opportunity Funds Gaining Popularity

Due to some complexities, Luscombe says QOFs got off to a slow start. “It was sort of buried in the Tax Cuts & Jobs Act, and people didn't pay a lot of attention to it initially,” he says. “But the more people looked at it, the more people saw it had a lot of potential.”

So far, about $7.5 billion has been invested in QOFs—about half of that has come in since December 2019. He suspects that some of the clarifying regulations that came out then helped answer peoples’ questions and increased their comfort level with this type of investment.

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