Qualified Opportunity Funds

When it comes to our investments, when they appreciate, we want to keep as much of those gains as possible. However, when you sell assets, you pay tax on any capital gains.  The Tax Cuts and Jobs Act of 2017, created Qualified Opportunity Funds (QOF’s) — which offer a way for investors to possibly defer or eliminate capital gains on existing investment holdings as well eliminate capital gains taxes on investments in the QOF.   

The “catch” is that, to benefit from the tax incentives, investments must be made to projects inside a Qualified Opportunity Zone.  These “Zones” include projects designed to spur growth in economically disadvantaged areas of the country. 

Under the new law, “By investing into a QOF, a taxpayer gains the ability to defer taxes from the sale of any asset (including intangible assets like stocks), as long as the portion of the proceeds attributable to the capital gains on the asset that’s been sold are reinvested into a QOF within 180 days,” wrote Jeffery Levine, Director of Advanced Planning at Buckingham Wealth Partners.  “And if the investors hold the QOF for at least ten years, then all of the tax attributable to the gains of the QOF, itself, are completely eliminated if the QOF is sold.” 

Of course, the actual details of what it takes to qualify are much more complicated and beyond the scope of this article.  There are other serious complications such as investors will have to contend with the fact that the law sunsets in 2026.  This sunset means that any new investors to QOFs won’t receive all the basis increases written in the bill and that if 2026 comes before your ten-year mark, any still-deferred gains will become taxable. 

Investments into QOFs pose risk as any investments do. And, the attractive tax benefits tend to distract investors from the underlying economics of a potential project.  According to Levine, “Although QOFs do offer several unique and useful tax benefits that can’t be found in any other vehicle, investors should look carefully at more mainstream gain management strategies before going down the QOF road.”