The concept of Non-Qualified Financial Property (NQFP) is related to the Qualified Opportunity Fund (QOF) industry, which is part of the U.S. tax code and was created by the Tax Cuts and Jobs Act of 2017. QOFs are investment vehicles designed to encourage investment in economically distressed communities known as Opportunity Zones.
NQFP refers to financial property, such as stocks, bonds, or other financial instruments that do not qualify as part of the required investment in Opportunity Zone property. The regulations stipulate that a QOF must hold at least 90% of its assets in qualified Opportunity Zone property, which includes both tangible property in an Opportunity Zone and equity interests in businesses that operate in an Opportunity Zone.
NQFP would be any financial holdings that do not meet these criteria. This might include investments that are not located within an Opportunity Zone, or investments in financial products that are not directly tied to economic development within these zones. Such assets might be subject to different tax treatment and could impact the QOF’s compliance with the rules governing these specialized investment vehicles.
In more detailed terms, NQFP might include:
- Debt instruments: Except under certain circumstances, these are generally considered NQFP.
- Excess cash reserves: Holding too much working capital for a prolonged period may be considered NQFP unless it can be shown that the funds are held in a manner consistent with a scheduled plan in line with the development of a trade or business in an Opportunity Zone.
By limiting the holding of NQFP, the rules aim to ensure that the capital invested in a QOF is indeed being used to foster economic development in underserved areas, in line with the policy goals that led to the creation of Opportunity Zones.