Understanding QOZ Fund reporting requirements


In April, the IRS announced that taxpayers not meeting the requirements for compliance with Qualified Opportunity Zone (QOZ) Funds would start receiving notices. Qualified opportunity zones were created by the 2017 Tax Cuts and Jobs Act. Essentially, taxpayers who invest in a physical property located within an identified opportunity one have the ability to defer taxes on previous capital gains or potentially avoid them all together.

The idea behind the zones is to incentivize investment in economically disadvantaged areas to help spawn development and in turn, drive the economy in those areas.

Qualified opportunity funds essentially are created like a mutual fund for investors to buy into where the underlying investments of the fund consist typically of multiple qualified opportunity zone properties.

Investors have to first invest their previously earned capital gains into a fund within 180 days of the original gain in order to meet the requirements for deferring the gain for income tax purposes. The fund will take in investments from multiple sources and funds are then used to develop identified properties. Most buildings are then leased and start producing a return on investment to their investors in the form of ordinary income.

Investments held for more than 10 years have the potential to have capital gains permanently deferred when the property is sold or exchanged.

But the funds have annual reporting requirements. Investors in funds are required to file Form 8996 annually to report their investment in these funds. According to the April IRS update, taxpayers are missing the boat when it comes to including required annual filing with their federal income tax returns. Taxpayers will begin receiving notices requesting more information related to their investments in the QOF.

In order to correct the issue of the missing annual forms, taxpayers will be required to file amended returns to complete compliance requirements.

Failure to comply can result in the fund losing its status as a QOF and the taxpayer(s) losing the advantage of the investment. Consider adding a question to your future tax questionnaires to ask clients directly about their activities in these funds to help avoid instances of non-compliance or the need to file amended returns.

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