Qualified Opportunity Funds – a new way to defer gains

Investors looking for a way to defer capital gains have been limited to techniques that only apply to certain types of gains, typically real estate or small businesses. A provision of the Tax Cuts and Jobs Act (TCJA) has created a new investment opportunity that will offer more flexibility and tax benefits for investors looking to defer their capital gains.

Qualified Opportunity Funds, or QOF’s are designed to drive investments in low-income communities (known as Qualified Opportunity Zones, or QOZ’s) throughout the United States. To promote these investments, QOF’s offer taxpayers three major benefits- (1) the ability to defer the tax on capital gains rolled into the QOF, (2) a partial exclusion of that gain after a certain period of time, and (3) and tax free growth for long-term investors.

QOF investments can be made from the sale of any asset that results in a capital gain, including stock sales, mutual funds, real estate, businesses, etc. The gain that is reinvested can be either short-term or long-term.

Once the investor has held the QOF investment for five years, their cost basis is increased by 10 percent of the amount of the original gain that was deferred. If the QOF is held an additional two years, the basis is increased by another 5 percent.

If an investor holds the QOF investment for at least 10 years and then sells it, any gain arising from the difference between the original amount invested in the QOF and the amount realized on the eventual sale is exempt from tax.

Like any investment, QOF’s present risks, and potential investors need to evaluate a QOF on its investment merits and avoid a decision based strictly on the tax benefits alone.

If you would like to discuss a specific situation with a professional please contact Fred Day.

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