Invest In Qualified Opportunity Funds Before Year End to Beat Deadline

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Obermayer Rebmann Maxwell & Hippel LLP

While investments in Qualified Opportunity Funds may continue to be made well after the end of 2021, the 10% tax reduction on the capital gains invested in the Qualified Opportunity Fund will be gone by December 31, 2021. If investors are considering making an investment in a Qualified Opportunity Fund, such investments should be made before year-end. 

The Qualified Opportunity Zone program was introduced to investors in the 2017 Tax Cuts and Jobs Act.  The purpose of the program was to increase long-term investments in economically depressed communities throughout the US. To participate in this program investors were required to timely invest capital gain proceeds such as proceeds from a sale of property in a Qualified Opportunity Fund. To incentivize investors to make these investments, the program offered 3 major tax breaks:

  1. The temporary (until December 31, 2026) deferral of taxation on the capital gains proceeds that are invested in the Qualified Opportunity Fund,
  2. A 10% reduction of tax on the capital gains invested in the Qualified Opportunity Fund if such investments are held for 5 years and an additional 5% reduction if such investments are held for 7 years for a maximum tax reduction of 15%, and
  3. The permanent tax exclusion of the appreciation in the investments held by the Qualified Opportunity Fund upon the sale (or exchange) if such investments are held for 10 years.

The tax on the capital gains invested in the Qualified Opportunity Fund is deferred until December 31, 2026, which means such capital gains will be included in the investor’s income on that date.  For the capital gains to qualify for the tax reduction benefit, the 5-year and 7-year holding period must be satisfied by December 31, 2026.    

Unfortunately, the maximum tax reduction of 15% is no longer available. For investments in a Qualified Opportunity Fund to be held for 7 years, the investment must have been made no later than December 31, 2019.  However, the 10% tax reduction benefit is still available if investors make their contributions by December 31, 2021. If investors are wavering on the timing of their investments, this additional tax benefit may be enough to tip the scale to make those investments before the year ends. 

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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