• A substantial improvement to the building is measured by the QOF’s additions to the adjusted basis of the building (excluding the land).
• The QOF is not required to separately substantially improve the land upon which the building is located.
• To ‘‘substantially improve’’ a property, an O Fund (or subsidiary) must make additions to basis with respect to such property during a 30-month period in the hands of the O Fund (or subsidiary) that exceed the basis at the beginning of the 30-month period.

A partnership may elect to defer all (or part) of a capital gain. If an election is made, the elected deferred gain is not included in the distributive shares of the partners. If the partnership does not elect to defer gain, a partner generally may elect its own deferral with respect to the partner’s distributive share. The partner’s 180-day period generally begins on the last day of the partnership’s taxable year.

• https://www.irs.gov/pub/irs-drop/reg-115420-18.pdf
• https://www.irs.gov/pub/irs-drop/rr-18-29.pdf

A QOZ is a designated census tract in the United States that has been selected by a state governor and certified by the U.S. Department of Treasury for inclusion in the QOZ Program.

Governors were allowed to nominate up to 25% of their total low-income communities (“LICs”) for certification by the Treasury as QOZs.

An LIC is a census tract that meets one of the following qualifications:

• The poverty rate for the LIC is at least 20%
• If the LIC is located in a metropolitan area, the median household income does not exceed 80% of the median household income for that metropolitan area (or the statewide median household income, whichever is greater)
• If the LIC is not located in a metropolitan area, the median income does not exceed 80% of the statewide median household income

Deferral

• The most immediate QOZ tax benefit is the ability to defer the recognition of capital gains invested in a QOF as taxable income until the QOF investment is sold or December 31, 2026, whichever occurs first.

Note: There is no limit on the amount of gains that can be deferred in this manner.

Reduction

• Capital gains taxes may be reduced through a step-up in basis. Investors who hold their QOF investment receive a 10% step-up2 in basis for investments made before December 31, 2021 and held until December 31, 2026.

Elimination

• Investors who hold their investment for at least ten years pay no tax on the appreciation of their QOF investment upon disposition of such QOF investment, regardless of the size of the potential profit.

All investments involve risk and the realization of the benefits is dependent on proper structuring and the structure and performance of the future investments selected. Not all investments will provide all of these benefits.

A capital gain is eligible for deferral if it is from the sale or exchange of property with an unrelated party (not more than 20 percent common ownership) and the gain is treated as a capital gain (short-term or long-term) for federal income tax purposes. In order to qualify for QOZ tax treatment, such gain must be invested into a QOF within 180 days of recognizing the gain (note: the deadline for investment has been extended for some taxpayers due to COVID-19; see answer to question: “Has the federal government extended the timeline for QOZ investment in response to COVID-19?”.)

Gains from a wide range of investment assets are eligible, including gains from:

• Stocks, bonds, options, hedge funds
• Primary and secondary residences
• Businesses, machinery, commercial buildings, rental properties
• Land, livestock, art, wine, automobiles

QOZ regulations provide that taxpayers eligible to elect gain deferral include:

• Individuals
• C Corporations (including regulated investment companies (RICs) and real estate investment trusts (REITs))
• Partnerships
• Certain other pass-through entities

The first day of the 180-day period to reinvest gains into a QOF generally is the date on which the gain would be recognized for federal income tax purposes.

This means that any type of capital gain, short or long-term, realized on or after October 4, 2019 is still eligible for the tax benefits related to the QOZ Program until at least March 31, 2021. There is additional flexibility for K-1 partnership gains and Section 1231 property gains realized on or after January 1, 2019.

Key dates and timelines for investors are as follows:

• 180 Days: Generally, a taxpayer has 180 days from recognizing a capital gain to invest in a QOF to qualify for tax incentives. Also, the federal government has temporarily extended the deadline for investment for some taxpayers to March 31, 2021; see answer to question: “Has the federal government extended the timeline for QOF investment in response to COVID-19?”
• 5 years: If the investment is held for at least five years prior to December 31, 2026, the investor receives a step up in basis equal to 10% of the original gain amount invested in the QOF reducing the capital gain amount on which taxes are owed
• 10 years: The investor must hold the interest in the QOF for at least 10 years to qualify for elimination of taxation on gains related to appreciation of the investment
• March 31, 2021: In response to the COVID-19 pandemic, the federal government has extended the deadline for investment into a QOF to at least March 31, 2021 for any taxpayer whose 180-day investment window would have ended on or after April 1, 2020 and before March 31, 2021
• Dec 31, 2021: The taxpayer must invest in a QOF by this date to qualify for a step up in basis equal to 10% of the original gain amount invested in the QOF
• Dec 31, 2026: End of the legislated deferral period (taxes on deferred gains must be paid no later than tax year 2026)
• Dec 31, 2047: End of the capital gain exclusion period