The purpose of the Qualified Opportunity Zone program is to direct some of the trillions in investors’ capital gains toward economic revitalization in federally designated Qualified Opportunity Zones. In response, those investors receive a bevy of potential tax deferral benefits. One of these benefits was the step-up in basis. We say “was” because the final basis step-up benefit came to an end on Dec. 31, 2021.
The idea behind this benefit was that an investor funneling capital gains into a Qualified Opportunity Fund (QOF) for five years received a 10% step-up in basis. If the investor kept their money in the QOF for seven years, they received an additional 5% basis step-up.
Simplifying the above, someone who invested capital gains in a QOF and left it there for seven years could have avoided paying taxes on 15% of their initially deferred capital gains.
As mentioned above, the step-up in basis benefit doesn’t exist anymore. The Opportunity Zone program itself is set to expire on Dec. 31, 2026, and the step-up in basis feature required five- and seven-year hold times. But QOFs will still remain for investors that want to obtain their 10-year capital gains exclusion. The actual QOZ designations are set to end on Dec. 31, 2047.
But there is some evidence that the step-up in basis could return. In April 2022, a proposed, bi-partisan Opportunity Zone Transparency, Extension and Improvement Act asked that the Opportunity Zone deadline be extended by two years and end on Dec. 31, 2028.
The bill is part of a series of tax legislation proposals that is currently on hold. But if the bill should be made into law, it would also extend the basis step-up for QOF investments.
Specifically, it would mean that investments made in QOFs by Dec. 31, 2022, could qualify for a 15% basis step-up. Meanwhile, investments made by the end of 2023 could qualify for a step-up in basis of 10%. Under this act, the QOZ incentives would be extended by two years. Meanwhile, the time required to qualify for a step-up in basis would be reduced.
That’s for the future. As of now, the step-up benefit is gone. But there could still be advantages to investing in a Qualified Opportunity Fund. To understand if this is a good investment strategy, be sure to discuss the situation with a qualified tax professional or certified financial planner.