Although there’s been plenty of coverage of many of the provisions in the Tax Cuts and Jobs Act – most notably the lower tax rates and the IRC Section 199A QBI deduction – there are other changes that will have significant implications for certain taxpayers. One such provision is the Qualified Opportunity Fund (QOF), which was created by the TCJA in order to encourage investment in certain low-income areas designated as “Qualified Opportunity Zones.”
Specifically, investing into a QOF can provide taxpayers substantial benefits, including the ability to defer tax on capital gains from the sale property (including soft assets like stocks) that are reinvested in a QOF, basis increases on deferred gains reinvested into a QOF after five years (and again after seven years), and the complete elimination of capital gains tax on growth attributable to gain reinvested in a QOF (if the QOF is held for at least 10 years).
The caveat, however, is that, in order to receive the full array of QOF benefits, the latest date (according to the current tax code) that gains on the sale of assets can be invested into a QOF is December 31, 2019. Past that date, investors will begin to lose out on basis increases and, thanks to what’s widely assumed to be poor drafting, potentially other benefits as well. Furthermore, the deferral of the gains on the funds used in the initial investment isn’t perpetual. Gains timely reinvested into a QOF will become taxable (except for any basis increases received after years 5 and 7) at the end of 2026 (or when the QOF is sold, if sooner).
Meanwhile, despite the attractive tax benefits, advisors should exercise caution and perform their normal investment due diligence before jumping in with both feet. Bad investments with good tax attributes are, at the end of the day, still bad investments. Questions such as “What are the management team’s qualifications?”, “What are the expenses to investors of the fund?” and “What sort of assets (which, by their very nature, are illiquid) will the fund be targeting?” are all essential to answer.
Nonetheless, investors who have sold appreciated assets within the past 180 days, or plan to do so in the near future, should evaluate the merits of investing into a QOF. However, the reality is that many investors’ tax planning needs will be better served by using existing strategies, including 1031 exchanges, charitable trusts, and simply holding on to existing assets – all of which may provide tax benefits, including indefinite tax deferral.
source https://www.kitces.com/blog/qualified-opportunity-zone-qoz-fund-qof-defer-avoid-capital-gains/
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