QUALIFIED OPPORTUNITY FUNDS (QOF)
If you’re selling a business, real estate, or a highly appreciated stock, re-investing in a qualified opportunity fund could help you defer, reduce, or eliminate capital gains taxes — while making an impact in the process.
In 2017, the Tax Cuts and Jobs Act established a new tax incentive to encourage investments in over 8,000 designated opportunity zones that haven’t seen significant capital investment in decades.
When you invest in properties through a qualified opportunity fund, you’re not only eligible for significant tax benefits. You’re also revitalizing up-and-coming communities by creating more jobs, driving business, and expanding housing.
You can defer both short and long term capital gains until December 31, 2026 when you invest in a QOF within 180 days of the sale of your asset.
You’ll pay no taxes on capital gains acquired after your money has been invested in the QOF, as long as you keep the investment for at least 10 years.
You can keep your funds invested until 2047, giving you decades with the potential to increase your funds without any additional capital gains tax burden.
Two investors each sell an asset that generates a $1,000,000 long-term gain. Investor A pays capital gains taxes and invests the remaining capital in a product that generates a 10% compounded annual return over ten years and then liquidates the investment. Investor B invests the gain in a Qualified Opportunity Fund, which generates the same return over the same time period. Both investors are residents of a state that conforms with the QOZ Program and are subject to the top marginal U.S. federal income tax rate of 20% on long-term capital gains for individuals, the net investment income tax of 3.8% and a state tax of 6.2%, for a total tax liability of 30%.
Capital Gain Proceeds From Sale
Long-term Capital Gains Tax Rate (Federal + ACA)
Compounded Hypothetical Return
Capital Gain Proceeds From Sale
$1,000,000
$1,000,000
2021 Taxes Owed On Gain
($300,000)
Deferred
Capital For Reinvestment (after tax)
$700,000
$1,000,000
Appreciation
$1,115,620
$1,593,742
Tax on Appreciation
($334,686)
Eliminated
Long Term Capital Gains Taxes (Paid in 2027)
0
($300,000)
Add back initial investment
$700,000
$1,000,000
Final Value (After 10 Years, Net of Taxes Paid)
$1,480,934
$2,293,742
Initial Capital Gain (2021)
$1,000,000
$1,000,000
Taxes Paid (2021)
($300,000)
0
Capital for Reinvestment
$700,000
$1,00,000
Sell Investment
Sale Proceeds (2032)
$1,815,620
$2,593,742
Taxes Paid (2027)
$0
($300,000)
Taxes Paid (2032)
($334,686)
0
Ending Value Net of Taxes
$1,480,934
$2,293,742
Difference with QOF
$812,809
Qualified Opportunity Funds are speculative in nature and heavily reliant on the assumptions used by investment sponsors which may prove to be inaccurate.
No public market currently exists and one is unlikely to develop. Selling an interest in a QOF may proved to be difficult or impossible.
Investments in real estate are subject to various economic risks including among other things recession, inflation, supply and changing market demographics.
The amount and timing of QOF investment distributions are not guaranteed. There is no guarantee that investor will receive distributions or a return of capital.
Tax rules and guidelines for QOZ investing have not been finalized and subsequent changes to QOZ rules and guidelines may have material adverse consequences to QOF Funds and their investors.
The regulatory framework governing QOZ investing is fluid and changes are ongoing. Subsequent changes to QOZ and QOF regulations may have material adverse consequences to QOF Funds and their investors.
Let’s talk through your circumstances, your goals, and your questions so that you can make the most informed decision about your next investment. Fill out the form below or give us a call, and you’ll hear back from us within 1 business day.