QUALIFIED OPPORTUNITY FUNDS
The Tax Cuts and Jobs Act of 12/22/17 established an entirely new system of capital gains tax deferral and forgiveness. Neither the Act or the regulations so far promulgated are very well written however, and there are thus some uncertainties. NO RELIANCE SHOULD BE PLACED UPON ANY CONTENT OF THIS ARTICLE. COMPETENT INDEPENDENT PROFESSIONAL ADVICE SHOULD BE RETAINED.
Essentially the framework consists of a public side and a private side. The Governor of each state is permitted to designate 25% of each statistical area within his state as Qualified Opportunity Zones (QOZs). Taxpayers can set up a partnership or corporation or LLC (treated as either corporations or partnerships for federal income tax purpose) and designate it a Qualified Opportunity Fund (QOFs) by filing an election with their federal income taxes. Presumably the purposes of this QOF must be to invest at least 90% of its assets in QOZs, but it is possible that any partnership, corporation, or LLC can be qualified regardless of its stated purposes, subject to later being disqualified if 90% of the assets are not invested in QOZ's within the earlier of six months of the funds establishment or the last day of the taxable year.
The QOF apparently must be created by 12/31/19/
There is a 180 day period after the sale of an asset during which the taxpayer must contribute either the amount of the capital gains or a portion of the capital gains, presumably either long term or short term, from the sale of ANY ASSET to the QOF to defer taxation. Subject to this 180 day rule, amended tax returns can be filed. Either the original tax return or the amended return must have a Form 8996 filed with it for the contribution to qualify for capital gains tax deferrral.
No capital gains taxes are due in the year of contribution and in each year that the funds are kept on the QOF through 12/31/2026. The tax is simply deferred.
If the funds are kept in the QOF for 5 years, the original capital gains basis is increased by 10%, an additional 2 years but an additional 5% (presumably compounded) and for an additional 3 years (taking us strangely beyond 2026!!) to 100%, i.e. a complete forgiveness of the originally deferred capital gains tax. Strangely, if the asset is not sold by 12/31/47 apparently these forgivenesses are lost.
Moreover any capital gains (there is confusion about rental or interest income) earned by the QOF during the holding period are not taxed at all.
The QOF must "substantially improve" any other wise qualifying investment property within 30 months of the initial investment in the property. There is some authority that the IRS is going to require a doubling of the initial investment in the acquired property to deem it substantially improved.
The property acquired by the QOF does not have to be real estate but can be almost any asset EXCEPT golf courses, country clads, massage parlors. hot tub or sun tanning businesses. gambling, or alcohol sales.
Please understand that no advise, legal or otherwise, is offered by this article and no one should rely upon any of its content, the sources available to me being unreliable and at times in conflict. Before attempting to utilize this vehicle to defer or avoid capital gains anyone should consult a competent tax or legal advisor and thoroughly research matters before proceeding. That said, this looks like a potentially valuable tool to GREATLY increase the IRR of proceeds from investments that have greatly increased in value since their purchase.