Qualified Opportunity Fund (QOF) Investments, Form 8997 (2023)

A Qualified Opportunity Fund (QOF) allows deferring capital gains taxes by investing in economically distressed communities. Form 8997 helps the IRS track these investments and report gains/dispositions.

What are QOFs?

• Investment vehicles channeling capital into designated Opportunity Zones (OZs) - economically disadvantaged areas.
• Must hold at least 90% of assets in OZ property (real estate, businesses).
• Offer tax benefits like:
  • Deferring capital gains recognition: Invest gains in a QOF within 180 days of realization.
  • Reducing deferred gains: Up to 10% reduction after 5 years, 15% after 7 years.
  • Exempting future appreciation from capital gains taxes: Hold the QOF investment for at least 10 years.

What is Form 8997?

• An IRS form used by eligible taxpayers to report QOF investments and deferred gains.
• Required annually if you hold a QOF investment at any point during the tax year.

The Form Tracks:

• Beginning and ending year balances of QOF investments and deferred gains.
• Capital gains deferred by investing in a QOF.
• QOF investments disposed of during the year.

Who needs to file Form 8997?

• Eligible taxpayers: Individuals, corporations, trusts, and estates that:
  • Realized a capital gain during the tax year.
  • Invested the gain in a QOF within the 180-day window.
  • Are required to report the gain recognition under federal tax rules.

Key points to remember:

• Timely filing: Submit Form 8997 with your timely filed federal income tax return (including extensions).
• Penalties for non-filing: Failure to file can result in penalties and interest charges.