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April 2020

A Qualified Opportunity

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When you sell appreciated assets, you pay taxes on them in the year you realize capital gains. But when you invest in a Qualified Opportunity Fund (QOF), you defer capital gains taxes and potentially receive tax-free appreciation. If you invest outside of a qualified retirement plan, you might explore how these types of funds could fit into your investment strategy.

Qualified Opportunity Zones (QOZs) were created by the Tax Cuts and Jobs Act (TCJA), the last major federal tax overhaul, to benefit economically distressed areas and those who invest in them. QOF investments are either corporations or partnerships that must meet a number of requirements. For example, a QOF must hold at least 90% of its assets in QOZ property, and at least 50% of a zone property’s gross income should come from conducting business in a designated zone.

If you reinvest capital gains into these funds, you defer gains until selling or exchanging shares (until 2026, when this provision expires with the rest of the TCJA). If you hold the investment for at least five years, you’ll get a 10% step up in basis on reinvested capital gains. A special rule applies if you hold a QOF at least 10 years: the amount gained will be tax-free because the basis will increase to 100% of fair market value once gains are realized. Talk to your tax professional to learn more.


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