New instructions for IRS Form 8949, Sales and Other Dispositions of Capital Assets, address gain that is deferred when an investment is made in a Qualified Opportunity Fund. If a taxpayer realizes gain on a sale of an asset, but invests that gain in a QO Fund within 6 months, the taxpayer may be able to avoid paying taxes on part or all of the gain.
The Form 8949 instructions are only a draft, but the IRS believes they include the changes for reporting deferred gain.
QO Funds for QO Zones
QO Funds are tax-favored vehicles for investing in Qualified Opportunity Zones. The Tax Cuts and Jobs Act added these Funds to expand a grab-bag of expired investment incentives for empowerment zones, renewal communities, and similar areas.
A QO Zone is a low-income census tract:
- designated by a state; and
- certified by the IRS.
There are QO Zones in all 50 states, the District of Columbia, and several U.S. territories.
QO Fund Tax Benefits
QO Fund investments offer three big tax benefits:
- The taxpayer can defer virtually any capital gain that is invested in a QO Fund within 180 days.
- A portion of the gain is permanently excluded from income if the taxpayer holds the investment for more than five years.
- All of the invested gain is excluded from income if the taxpayer holds the investment for more than 10 years.
How to Report Deferred QO Fund Gain on Form 8949
According to the instructions, a taxpayer that defers gain by investing in a QO Fund begins by reporting the gain as usual. For instance, an individual reports the gain on Form 8949 and Schedule D (Form 1040), with no adjustments in column (g).
The deferred gain that is invested in a QO Fund is reported on its own row. The taxpayer should use a separate row for investments in separate QO funds, or for investments in the same fund on different dates. However, gain from separate transactions can be grouped together if the gains are all short-term or all long-term, and they were invested in the same Fund on the same date. The taxpayer does not have to trace or allocate QO Fund investments to specific deferred gain.
For short-term gain, the taxpayer should use Part 1 of Form 8949, with box (C) checked. For long-term gain, the taxpayer should use Part II, with box (F) checked. The taxpayer must complete a separate row for each Fund.
- In column (a), enter “QO Fund,” and the fund’s name and taxpayer identification number.
- In column (b), enter the date the taxpayer invested in the fund.
- Leave columns (c), (d) and (e) blank.
- In column (f), enter code “Z”.
- In column (g), report the deferred gain as a negative number.
by Kelley Wolf, JD, LLM