Avoiding Disguised Sales in Qualified Opportunity Funds: Critical Tax Considerations for QOF Investments

The current tax law provides tax incentives for investments in areas designated as qualified opportunity zones (QOZ), allowing investors in QOFs to defer and partly eliminate the tax on capital gains invested in the QOF and eliminate the tax on appreciation in the QOF investment. Recent IRS regulations and the application of disguised sale rules to these investments require an in-depth knowledge of key tax provisions to obtain and preserve tax benefits of the QOF investment.

An investor is eligible for QOZ benefits if, within 180 days after recognizing capital gain from the sale of a property to an unrelated person, the investor invests an amount equal to all or part of that capital gain in a QOF. Under recent IRS proposed regulations, a QOF investor obtains these benefits if the interest is acquired from a direct owner of the QOF or contributes property other than cash to a QOF.

For QOFs set up as partnerships, new IRS proposed regulations apply complex rules for disguised sales to leveraged distributions to QOF partners. The application of these rules can disqualify all or a portion of a partner's QOF investment. Tax counsel and advisers must understand the nuances of applying disguised sale rules to QOF investments to ensure that a QOF investor maintains the tax benefits allowed under current tax law.

Listen as our panel discusses key tax considerations for making and holding investments in QOFs, the application of disguised sale rules, partnership assumptions of liabilities, debt-financed distributions, and other related topics.