Form 8997 is used to report transactions related to qualified opportunity funds. The form is filed each year that an investor has capital gains deferred in a qualified opportunity fund. In this article, we’ll go through what’s involved with filling out Form 8997 and who should file it.
What Is Form 8997?
Let’s first summarize how investors defer capital gains using a QOF (Qualified Opportunity Fund). QOF investors sell a capital asset for a gain and drop that gain into a QOF within 180 days, allowing them to defer taxes on the gain.
This process starts with Form 8949. When an investor sells a capital asset such as a security or real property, Form 8949 is filed. When an investor exchanges from a security or real property into a qualified opportunity zone, Form 8949 is filed. This form informs the IRS of the capital asset and any potential deferment of taxes.
You can view Form 8997 here. Form 8997 is filled out each year for as long as an investor has an opportunity zone investment. There are four parts to the form.
- Part I — Total QOF Investment Holdings Due to Deferrals Prior to Beginning of Tax Year.
- As of Fall 2022, this isn’t likely to be filled out for investors who invested in a QOF (Qualified Opportunity Fund) in 2021. Although 2020 investors will probably fill in this section.
- Part II — Current Tax Year Capital Gains Deferred by Investing in QOF.
- Description of the fund. Fill in fund(s) acquisition date, EIN (Employer Identification Number), percentage acquired, and the amount being deferred (usually from Form 8949). Investors will want to refer to their tax accountants for the remaining sections of Part II (i.e., checkboxes).
- Part III — Inclusion Events and Certain Other Transfers During the Current Tax Year.
- This section is filled in if you have pulled funds out of the QOF.
- Part IV — Total QOF Investments Due to Deferrals at Year End.
- The aggregate of transactions for the year. Start with the initial amount in the fund, add new investments and subtract any funds taken out. The new total will go in this section.
Who Should File Form 8997?
Investors who defer capital gains through a QOF should file Form 8997.
Note that the information provided by each QOF administrator can vary. This can make it difficult to track down all the necessary information to fill in the form. It can also require some back and forth with the fund administrator to track down necessary information.
Some QOFs will provide a K-1, which will have most of the information needed for Form 8997. But the arrival of a K-1 also varies by the fund and can be delayed significantly compared to the arrival of other tax documents.
Some funds may issue a 1099, which simply means they are structured a little differently from those issuing K-1s. For 1099 funds, investors will list the number of shares instead of listing a percent interest on Form 8997.
For those investing via a company, the filer will list the entity's name and EIN instead of listing a personal name and social security number. Also, the filing deadline for a company is March 15 instead of April 15 for individuals.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
