While many changes created by the Tax Cuts and Jobs Act have grabbed the media limelight, not much attention has been given to a new tax benefit: Qualified Opportunity Funds. Beginning in 2018, a taxpayer can elect to reinvest proceeds from the sale of “any property” into a Qualified Opportunity Fund and defer the gain.
For those open to considering qualified investments, Subchapter Z, added by TCJA, outlines the basic rules for this new tax deferral strategy. Subchapter Z defines a Qualified Opportunity Fund as, “any investment vehicle which is organized as a corporation or partnership for the purpose of investing in qualified opportunity zone property.” Most states and the IRS have already finalized which underserved census tracts will be designated qualified opportunity zones. QO Funds have certain restrictions, such as, 90% of assets must be qualified investments, reinvestment periods when investments are sold, certain reporting requirements, and no fund of funds. Qualified investments include qualified business stock, partnership interests, or property in businesses that operate principally within a designated qualified opportunity zone.
Investors have 180 days from the date of sale to make a qualified investment and the sale itself can’t be with a related party. However, it’s surprising that the sale of “any property” seems to qualify for deferral and the IRS needs to provide further guidance on how taxpayers make an election. Until then, there’s not much clarity on the finer points. For now, it’s something for investors, business owners, and advisors to keep an eye on.