Similar to the capital gain tax deferral advantages of a Section 1031 exchange, but available for both real estate and non-real estate gains, Qualified Opportunity Funds allow investors to sell existing low basis property and defer paying capital gain tax on the sale by investing the gain in a Qualified Opportunity Fund. By investing the gain in a Qualified Opportunity Fund and holding the fund investment for at least ten years investors can: (i) eliminate 15% of the capital gain tax liability, (ii) defer payment on the remaining 85% of the capital gain tax until 2026, and (iii) enjoy a permanent 100% exemption from tax on capital gains realized from the Qualified Opportunity Fund investment. Any entity that is taxed as a partnership or corporation that holds Qualified Opportunity Property can self-designate as a Qualified Opportunity Fund. The following is a pro forma comparison of two hypothetical investors who liquate existing low basis investments and reinvest the proceeds: one in a traditional investment and one in a Qualified Opportunity Fund.
The pro forma illustrates that investing in the Qualified Opportunity Fund saves $193,885 in taxes and yields $555,492 more in investment growth, leaving the Qualified Opportunity Fund investor $749,337 better off than the traditional investor.
*Qualified Opportunity Fund investments that are held for ten years receive a step-up in basis to FMV upon their ultimate sale.