The Qualified Opportunity Fund (QOF) industry is related to the Opportunity Zones program in the United States, which was created by the Tax Cuts and Jobs Act of 2017. The aim of the program is to incentivize long-term investments in economically distressed communities by offering tax benefits to investors.
Tax Incentive as part of the Qualified Opportunity Fund industry refers to the following benefits provided to investors:
- Temporary Deferral of Capital Gains: Investors can defer paying taxes on prior capital gains by rolling those gains into a QOF. The deferred gain must be recognized on the earlier of the date on which the opportunity zone investment is sold or December 31, 2026.
- Step-Up in Basis for Capital Gains Held: If an investor holds their QOF investment for at least 5 years, there’s a 10% step-up in the original deferred gain. If held for 7 years, there’s an additional 5% step-up, totaling a 15% step-up in basis. This means only 85% of the original deferred gain would be taxed if an investor exits the investment after 7 years, but before December 31, 2026.
- Permanent Exclusion from Taxable Income of Future Gains: If the investment in the QOF is held for at least 10 years, any gains realized from selling the QOF investment can be permanently excluded from taxable income. This is a substantial benefit, as it offers a complete tax break on any appreciation in value of the QOF investment.
These tax incentives aim to attract private capital into these distressed communities, fostering economic growth and job creation. The program has been viewed as a potential win-win, offering tax breaks for investors and much-needed development capital for struggling communities. However, the effectiveness and impacts of the Opportunity Zones program continue to be studied and debated.