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.