…While these terms do not roll off the tongue, they present the in-the-know investor with a wonderful opportunity. Created as part of the Tax Cuts and Jobs Act of 2017, a QOZ is an economically distressed community in the United States where new investments get preferential tax treatment.

The QOFs, in turn, are investment structures (partnerships or corporations) that are established to invest in eligible property located in the QOZ’s and which use investor gains from prior investments to fund the projects. There is no need for the investor to live, work or maintain a business in the QOZ, they only need to invest in a QOF.

The benefits to the investor are the following:

1. Deferral of gain on the sale of investment property to an unrelated person until the earlier of the date on which the subsequent investment is sold or exchanged or December 31, 2026, as long as the gain is reinvested in a QOF within 180 days of the disposition of the investment.
2. The elimination of up to 15% of the gain that has been reinvested in the QOF based on holding period requirements.
3. Potential elimination of tax on gains associated with the appreciation in value of the QOF, provided that the investment in the QOF is held for at least 10 years.  Investments held longer than 10 years will be fully exempt from any tax on the appreciation in the QOF investment.

It should be noted that the above QOF benefits only apply to gains from the sale of initial investments invested into the QOF and not on the total sales price of the investment. While you can invest more into a QOF, this would require tracking of the two separate amounts, gain on sale of initial investment sale put into the QOF, and the additional investment made into the QOF over the original deferred gain.

If you would like further information about QOF’s, please get in touch.