If you’ve been paying attention to our blogs, you know that we’ve been writing a great deal about the Qualified Opportunity Zone (QOZ) program. This program allows you to take the capital gains earned from the sale of assets, and redirect those gains toward a Qualified Opportunity Fund (QOF). The result, for you, is a deferral of taxes on those profits.
But the IRS wants to know a couple of things if you decide to become a QOF investor. First, you need to report those capital gains. And second, you need to report that those gains are being invested in a QOF. As such, the two IRS forms you must fill out when it comes to your Opportunity Zone investments are 8949 and 8997.
IRS Form 8949
Form 8949, “Sales and Other Dispositions of Capital Assets,” tells the IRS that you sold capital assets, and realized either a profit (capital gains) or a loss (capital losses). Whether you kept track of these transactions or not, you’ll receive notification of them from your broker or agent, thanks to the IRS Form 1099-B, “Proceeds from Broker or Barter Exchanges.”
In recent years, taxpayers have used Form 8949 to let the IRS know that capital gains are being deferred into QOFs. Specifically, the form tells the IRS about:
- Your initial decision to defer your capital gains by investing them in a QOF
- Any disposition/sale of your QOF interest. In this case, you also need to check a box on your Schedule D, as well.
Keep in mind that Form 8949 doesn’t require an annual filing. Rather, you must file this form during the first and final years in which you own interest in a QOF. You aren’t required to file this form during years in which you simply hold your Qualified Opportunity Fund investment.
IRS Form 8997
Unlike the above Form 8949, Form 8997, “Initial and Annual Statement of Qualified Opportunity Fund (QOF) Investments,” must be filed each year during which you hold a QOF interest.
This form has four sections:
- Part I, which requires information about your QOF holdings at the beginning of the tax year
- Part II, which asks for information about deferred capital gains you invested into the QOF
- Part III, which wants information about any QOF interests you might have sold
- Part IV, which asks you about your QOF holdings at the end of the tax year
Additional information required on this form includes:
- The QOF’s employer identification number (EIN)
- The date during which you acquired your QOF interest
- A description of the investment, such as percentage interest in a partnership QOF, or the number of shares in a corporate QOF
- The amount of short- or long-term capital gains you deferred through QOF investment
Again, the above can be found on Form 1099-B; if you didn’t receive this form, you can indicate this on Form 8997.
The paperwork blues
The Qualified Opportunity Zone program can offer a variety of benefits, as well as complexities and red tape. While this article is meant to provide you with an overview about how to report an opportunity zone deferral, it’s important to talk to your tax advisor. Filing the right paperwork at tax time is essential, to ensure you don’t end up with a tax penalty surprise.
