The Tax Cuts and Jobs Act of 2017 provides for the creation of Qualified Opportunity Funds (QOF), which offer enticing tax incentives for investors with capital gains.
First, any investor who invests capital gains in a QOF, may delay paying taxes on those capital gains until December 31, 2026 or until the investment is sold.
Second, if an investor leaves its capital gains invested in a QOF for at least five (5) years, the investor receives a tax basis increase of 10%, meaning only 90% of the capital gains is taxed. For example, if an investor has $10,000 in capital gains and invests that money into a QOF, then after five (5) years, the investor will only owe capital gains tax on $9,000.
Furthermore, if the investor leaves the capital gains in a QOF for at least seven (7) years, the tax basis increases to 15%. Thus, the investor would only pay capital gains tax on $8,500. Since the deferral of tax payments on capital gains in only available until the end of 2026, the only way for an investor to take full advantage of the 15% benefit is to invest in a QOF by the end of 2019.
Third, if an investor leaves the capital gains in a QOF for at least ten (10) years, not only will the investor be allowed the benefit of the stepped-up tax basis as explained above until the end of 2026, but also the investor will not pay capital gains tax on any appreciation of the asset. The tax basis of the asset will be increased to the fair market value of the investment on the date the investment is sold. For example, if a QOF invests in a property worth $100,000 in 2019 and sells the property for $200,000 in 2030, an investor will not have to pay capital gains tax on its share of the $100,000 increase in the value of the property.
Even if an investor misses the deadline for the 10% and 15% tax basis increases, the investor may still participate in this benefit of avoiding paying taxes on appreciation so long as the investment is sold by the end of December 2047.