A Qualified Opportunity Fund (QOF) is a vital component within the Qualified Opportunity Zone (QOZ) program, which was established by the Tax Cuts and Jobs Act of 2017 in the United States. The QOZ program is designed to encourage economic development and job creation in distressed communities by providing tax incentives to investors.
A QOF is an investment vehicle that is set up as a partnership or corporation for investing at least 90% of its assets in eligible property (which includes business properties) within a Qualified Opportunity Zone. Investors can benefit from investing in a QOF by deferring capital gains taxes, reducing tax payments on those gains over time, and potentially excluding future gains generated from the fund if certain holding period requirements are met.
Here’s a breakdown of the main benefits investors can get from investing in a QOF:
- Deferral of Capital Gains: Investors can defer taxes on capital gains invested in a QOF until the investment is sold or until December 31, 2026.
- Step-Up in Basis: The basis of the deferred gain is increased by 10% if the investment in the QOF is held for at least 5 years, and by an additional 5% if held for at least 7 years, effectively excluding up to 15% of the original gain from taxation.
- Exclusion of Future Gains: If the investment in the QOF is held for at least 10 years, the investor is eligible to increase the basis of the QOF investment to its fair market value on the date that the QOF investment is sold or exchanged, effectively excluding any appreciation in the value of the QOF investment from taxation.
QOFs typically invest in real estate development, business financing, and other economic activities within the designated Opportunity Zones. By doing so, the goal is to spur economic growth and revitalization in low-income and undercapitalized communities.