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Strategies that flow from QOZs are:
Only the gains must be reinvested in a QOF to qualify for benefits. As a result, taxpayers can invest their principal in traditional alternatives. No other investment option allows a taxpayer to separate the gain from principal similar to a QOF.
All capital gains tax on the sale are deferred until 2026. The tax savings, therefore, are invested to increase the potential for profit which is consistent with the time-honored advice to “defer, defer, defer.”
The basis of the original property is increased by 15% assuming the QOF is purchased by December 31, 2019 and held until December 31, 2026. That basis increase represents a guaranteed return on the original sale.
The future appreciation on the QOF after it is purchased is permanently excluded from tax provided the QOF is held for at least 10 years. This long-term benefit is particularly attractive when planning for intergenerational transfers of wealth.
Real estate investors often sell properties when a good deal is presented even though they have not identified a replacement. As a result, a taxable transaction will occur. An investor can purchase a QOF and hold it until a suitable replacement is identified, thereby deferring gain and preserving planning options for the new acquisition. Note that liquidity of the QOF may restrict options on timing.
Sales often occur in one year and heaped gain increases the taxpayer’s marginal tax rates. A QOF can be purchased and sold over multiple years to spread the gain over multiple tax years and reduce the marginal rates. Note that liquidity of the QOF may restrict options on timing. Also, original gain is recognized in 2026 on a heaped basis unless otherwise sold before. However, assets held until December 31, 2026, can receive a step up in basis and future appreciation is excluded, both of which can be managed to spread gain over multiple years.