Tax season is in full swing. This generally means investors have various questions about what needs to be reported—and how—to the IRS.
An Opportunity Zone investment – or more specifically, an investment in a Qualified Opportunity Fund (QOF) which, in turn, invests funds into a Qualified Opportunity Zone (QOZ) – does have tax reporting requirements. This requirement needs to be met, even when an investor temporarily defers taxes on the amount of eligible capital gains that are invested.
As such, QOF investors should get to know these forms when reporting information about their QOF involvement.
Form 8949
Form 8949 – “Sales and Other Dispositions of Capital Assets” – serves many purposes for QOF investors.
First, investors that put their eligible capital gains into a QOF use this form. Specifically, investors use it to report an election to defer capital gain invested in a QOF.
Second, investors must also file Form 8948 when selling or exchanging their QOF investments during a given tax year. This document requires the amount of gain or loss incurred with such a transaction. According to the IRS, an investor must know the asset’s basis to determine gain or loss.
Basis is defined as the original purchase price of an asset (plus any additional costs related to the asset’s acquisition).
Form 8997
Then there is Form 8997 – “Initial and Annual Statement of Qualified Opportunity Fund (QOF) Investments.” The information on this form tells the IRS about QOF investments and any deferred gains held both at the beginning and end of the current tax year. Form 8997 also provides information about:
- Capital gains deferred through investment in QOFs
- QOF investments sold or exchanged within a current tax year
Form 8996
Finally, if an investor created a corporation, LLC, or partnership to serve as a QOF, said investor must file Form 8996 – “Qualified Opportunity Fund.” This form takes care of two things:
- It certifies that the entity does, indeed, meet the qualifications of a bona fide QOF (the entity is in place only for the purpose of investing in QOZ property).
- It proves to the IRS that the QOF met its investing standard during the tax year (the fund must hold at least 90% of its assets in QOZ property).
And . . . More?
The above discusses just three forms that investors must file in connection with QOF investments. But investing in Qualified Opportunity Funds creates many moving parts, which could mean additional reporting requirements. As such, the above is a starting point. It’s always a good idea for investors to work with professional tax advisors who are well-versed in the Opportunity Zone program. Doing so can ensure that the IRS receives the right information.
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. It should also not be construed as advice meeting the particular investment needs of any investor.
Investors in QOFs will need to hold their investments for certain time periods to receive the full QOZ Program tax benefits. A failure to do so may result in the potential tax benefits to the investor being reduced or eliminated.
If a fund fails to meet any of the qualification requirements to be considered a QOF, the anticipated QOZ Program tax benefits may be reduced or eliminated. Furthermore, a fund may fail to qualify as a QOF for non-tax reasons beyond its control, such as financing issues, zoning issues, disputes with co-investors, etc.
Distributions to investors in a QOF may result in a taxable gain to such investors.
The tax treatment of distributions to holders of interests in a QOF are uncertain, including whether distributions impact the aforementioned QOZ Program tax benefits.
A QOF must make investments in Qualified Opportunity Zones, which carries the inherent risk associated with investing in economically depressed areas.
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.
