Because the investor contributes funds that represent deferred capital gains, the investor starts with a tax basis of zero for his or her investment in the Fund. Upon the satisfaction of a 5-year year holding period, the statute provides for the investor to have a tax basis in the QOF investment equal to 10% of the original amount of the investor’s capital gain, and, upon holding the investment for an additional two years (seven years in all), the investor receives an additional 5% increase, for a total “free basis” (correspondingly, a reduction of deferred gain) equal to 15% of the original amount of the investor’s capital gain. The 5-year and 7-year holding periods are measured by and between the investor’s date of acquisition of the QOF investment and December 31, 2026.
If the QOF investment is not disposed of prior to December 31, 2026, the investor is treated as selling his or her interest in the QOF in a taxable transaction on December 31, 2026, for an amount realized equal to the lesser of: (a) the original deferred gain, or (b) the fair market value of the investor’s interest in the QOF. Federal income tax on the original deferred gain (reduced by any “free tax basis”) will be due and payable on or before April 15, 2027.
If the investor holds his or her interest in a QOF for 10 years or more, the investor is permanently exempt from paying federal capital gains tax on any gain realized from an increase in value of the investment during the Opportunity Zone Fund holding period recognized through the sale of his or her Fund investment.