Qualified Opportunity Fund
Qualified Opportunity Fund Tax Compliance
TCJA established the Qualified Opportunity Zone program to provide a tax incentive for private, long term investment in economically distressed communities. Investors are given an opportunity to defer and potentially reduce tax on recognized capital gains. If you owe taxes due to capital gains, investing in a qualified Opportunity Zone fund may be good idea to explore further.
What is an Opportunity Zone and a Qualified Opportunity Zone Fund?
An Opportunity Zone is a community nominated by the state and certified by the Treasury Department as qualifying for this program.
A Qualified Opportunity Zone Fund is any investment vehicle which is organized as a corporation or a partnership for the purpose of investing in qualified opportunity zone property (other than another qualified opportunity fund) that holds at least 90 percent of its assets in qualified opportunity zone property.
What is a Qualified Opportunity Zone Property?
How Does This Process Work? Or, How to Elect Deferral?
To defer a gain, a taxpayer has 180 days from the date of the sale or exchange of appreciated property to invest the realized gain (typically a capital gain) into a Qualified Opportunity Zone Fund. The fund then invests in Qualified Opportunity Zone Property. The taxpayer may invest the return of principal as well as the recognized capital gain, but only the portion of the investment attributable to the capital gain will be eligible for the exemption from tax on further appreciation of the Opportunity Zone Investment, as explained below. The Opportunity Zone program allows for the sale of any appreciated assets, such as stock with a reinvestment of the gain into an Opportunity Zone Fund. There is no requirement to invest in a like-kind property to defer the gain.
Tax Deferral and Savings
1. Tax deferral through 2026
A taxpayer may elect to defer the tax on some or all of a capital gain if, during the 180 day period beginning at the date of sale/exchange, they invest in a qualified opportunity fund. Any taxable gain invested in an Opportunity Zone Fund is not recognized until December 31, 2026, (due with the filing of the 2026 return in 2027) or until the interest in the fund is sold or exchanged, whichever occurs first.
2. No tax on 10% or up to 15% of deferred gains
3. No tax on appreciation
State Tax Considerations
Many states begin their calculation of state income tax with federal adjusted gross income or taxable income. Additions (or addbacks) and subtractions are then taken into account. Whether or not the tax deferral, exclusion and/or basis increases from the Opportunity Zone program are being adopted by states has yet to be addressed by many of the states. Where states do not conform with federal law as to this provision, investors may be required to recognize gain on the sale of their federally deferred investment in the year of sale and without any basis increase. On the other hand, if states require no modification, the deferral, exclusion and basis increase may give the taxpayer state tax benefits to complement their federal tax benefits.
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