Most investors know that Qualified Opportunity Funds (QOFs) offer powerful tax benefits. Taxpayers can defer the tax on the gains that are reinvested in the QOF until the earlier of December 31, 2026 or when they sell the QOF investment. Investors in QOFs also have the potential to eliminate tax on all appreciation in excess of the original deferred gain if the investment is held for at least 10 years. However, many investors are not aware that even if they sell or have a gain event with respect to their QOF, they can reinvest the gain into another QOF and continue to defer taxation and even receive nontaxable capital gains.
As long as the investor reinvests within the 180-day period following the sale or gain event they may be able to defer that gain again. They of course will need to meet all of the other requirements that apply to a QOF investment e.g., type and location of investment.
This approach can provide flexibility if someone wants to exit a QOF investment early due to changes in performance, strategy, or personal needs—without immediately recognizing taxable income. Investors can continue to defer the original gain until the earlier of December 2026 or sale. In addition, investors still have the potential to exclude future appreciation on the new QOF investment, but a new 10-year holding period begins with the new investment.
Bottom Line: By timely reinvesting an amount equal to the gain from an gain event with respect to your QOF investment, you can continue your deferral and potentially qualify for nontaxable capital gains after 10 years.
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