The IRS has provided over 50 FAQs on the QOF topic on its website, including links to the two Notices above that include the designated QOZs. While FAQs aren’t citable, they do provide significant information as to the IRS’s position on the subject. This is the link to the FAQs: https://www.irs.gov/newsroom/opportunity-zonesfrequently-asked-questions

In addition, the IRS in late December 2019 issued 544 pages of final regulations related to investors in QOFs and the QOFs themselves (TD 9889), which can be accessed here: https://www.irs.gov/pub/irs-drop/td-9889.pdf

Question: I sold stock for a gain in 2022 and during the 180-day period beginning with the date of the sale, I invested the amount the of the gain in a QOF. Can I defer paying tax on that gain?

Answer: Yes, you may elect to defer the tax on the amount of the gain invested in a Qualified Opportunity Fund. Therefore, if you only invest part of your gain in a Qualified Opportunity Fund(s), you can elect to defer tax on only the part of the gain which was invested.

Question: How do I elect to defer my gain on the 2022 sale of stock?

Answer: You may make an election to defer the gain, in whole or in part, when filing your 2022 Federal Income Tax return. That is, you may make the election on the return on which the tax on that gain would be due if you do not defer it. For additional information, see How to Report an Election to Defer Tax on Eligible Gain Invested in a QO Fund in the Form 8949 instructions.

Question: Can I elect to defer tax on gain if I already filed my tax return?

Answer: Yes, but you will need to file an amended return, using Form 1040-X and attaching Form 8949.

Question: I deferred gain into a QOF and now the QOF has dissolved before the end of my deferral period. What happens to my deferred gain?

Answer: When the QOF dissolved, the deferral period ended, and you must include the deferred gain when you file your return, reporting the gain on Form 8949.

Question: I deferred a gain into a QOF and then gave the investment to my children before the end of the deferral period. Is there anything I need to do?

Answer: Yes, the deferral period ended when you gave away the QOF investment. You must include the deferred gain when you file your return for the year of the gift, reporting the gain on Form 8949.

Note: Inheritance by a surviving spouse is not a taxable transfer, nor is a transfer, upon death, of an ownership interest in a QO Fund to an estate or a revocable trust that becomes irrevocable upon death.

Question: Can I defer section 1231 capital gains net income for a taxable year into a QOF

Answer: Yes, if a taxpayer’s section 1231 gains for any taxable year exceed the section 1231 losses for that year, the net gain is long-term capital gain. A taxpayer can elect to defer some or all of this capital gain under section 1400Z-2 by making an investment of a corresponding amount in a Qualified Opportunity Fund (QOF) during the 180-day period that begins on the last day of the taxpayer’s taxable year.

NOTE: The proposed regulations included a requirement that Sec 1231 gains and losses from the sale of business property be netted as of Dec. 31 to determine whether there were eligible capital gains for that year available for investing into a QOF. The final regulations do not require netting losses from other sales during the year and permit a Sec 1231 gain less any Sec 1245 or 1250 recapture income from each transaction to be invested in a QOF. (Reg 1.400Z2(a)-1(b)(11)(iii))

Question: Can I transfer property other than cash as an investment in a QOF?

Answer: Yes. A taxpayer can transfer property other than cash as an investment to a QOF. However, a transfer of non-cash property may result in only part of the investment being eligible for opportunity zone tax benefits, so that not all of the taxpayer’s capital gain is able to be deferred. See regulations §1400Z2(a)-1(b)(9) & (10).

Question: When I transfer property to a QOF, does my holding period of the property also transfer to the QOF?

Answer: No. The opportunity zones tax incentives provisions determine a taxpayer’s holding period in a qualifying investment in a QOF without regard to the holding period of the cash or other property transferred to the QOF.

Question: I made an investment in a QOF. After holding it for at least 10 years, I sell or exchange it. Can I adjust the basis to fair market value?

Answer: Yes, but only if you made the investment in connection with a proper deferral election. Also, the election must have remained in effect until that post-10-year sale or exchange. The election didn’t cease to be in effect solely because – on December 31, 2026 – the law requires you to include in your income the gain that you had deferred under that election.

Question: I had ordinary gain from the sale of property in 2018. During the 180-day period beginning on the date of the sale, I invested the amount of that gain in a QOF. In 2029, I sell my interest in the QOF. Can I adjust my basis to fair market value?

Answer: No. Because the gain wasn’t capital gain, you can’t elect to defer it. So, your investment in the QOF wasn’t made in connection with a proper deferral election. For this reason, the basis adjustment to FMV isn’t available for that investment.

Question: What is a Qualified Opportunity Fund?

Answer: A Qualified Opportunity Fund is an investment vehicle that files either a partnership or corporation federal income tax return and is organized for the purpose of investing in Qualified Opportunity Zone property.

Question: How does a corporation or partnership become certified as a Qualified Opportunity Fund?

Answer: To become a Qualified Opportunity Fund, an eligible corporation or partnership self-certifies by filing Form 8996, Qualified Opportunity Fund, with its federal income tax return. For additional information, see Form 8996 and its instructions. The return with Form 8996 must be filed timely, taking extensions into account.

Question: Can a limited liability company (LLC) be an Opportunity Fund?

Answer: Yes, a LLC that chooses to be treated either as a partnership or corporation for federal tax purposes can organize as a Qualified Opportunity Fund.

Question: When is tangible property “original use” tangible property?

Answer: Tangible property is original use on the date first placed in service in the qualified opportunity zone for purposes of depreciation or amortization. Used tangible property satisfies the original use requirement if the property has not been previously placed in service in the qualified opportunity zone.

Question: Can inventory in transit be “Qualified Opportunity Zone business property"?

Answer: Yes, inventory of a QOF, including raw materials, does not fail to be “used in a Qualified Opportunity Zone” solely because the inventory is in transit from a vendor to the QOF or from the QOF to a customer.

Question: What is the 50-percent-of-gross-income test?

Answer: A Qualified Opportunity Zone business must earn at least 50 percent of its gross income from business activities within a QOZ. It must do so for each taxable year. The proposed regulations provide three safe harbors that a business may use to meet this test. These safe harbors are the:

NOTE: The final regulations adopt these three tests and also include a fourth test, facts and circumstances. Any one of the four can be used to satisfy the 50% requirement.

Question: Must a Qualified Opportunity Zone business meet all three safe harbors to satisfy the 50-percent-of-gross income test?

Answer: No. It’s enough for a QOZ business to satisfy just one safe harbor. For example, 50 percent or more of all the hours of services that a business receives and uses were performed in one or more QOZs. This business satisfies the hours test and, therefore, the 50-percent-of-gross-income test.

Second example, a QOF owns a business that operates in multiple QOZs. The business received and used 100,000 hours of services during the year. Of those:

This business satisfies the hours test and therefore the 50-percent-of-gross-income-test. The aggregate hours of services in QOZs during the tax year were at least 50 percent of all hours of services obtained by the business in all locations.