Question

BACKGROUND

The 2017 Tax Act created a “Qualified Opportunity Fund” that can invest in a “Qualified Opportunity Zone.”

A QOF investment allows someone with a capital gain to defer that gain until the investment is sold or December 31, 2026. On 12-31-2026 deferred gains will be triggered. Basis adjustments to the deferred gain are available if the investment has been held for 5 years, and again at 7 years. If held for 10 years there is no tax on the appreciation in the investment (the original deferred gain, which occurred prior to the investment, is recognized no later than 12-31-2026).

MANY clients have heard about the QOF, although probably in very limited terms. Many of these people are intrigued with the possibility of a QOF.

The QOF offers some of the same benefits as a section 1031 exchange. In some ways a QOF appears better, in others it may be worse.

YOUR ASSIGNMENT

In APPROXIMATELY 1500 words (this is neither a limit nor a requirement), write a memo that will go out to clients that explains the important elements of a QOF investment. YOU decide what is important to include. Write it for a layperson. There is statutory law (Internal Revenue Code) and a first set of proposed regulations. Keep in mind that someone considering an investment in an opportunity zone has other options – they could sell their capital asset, pay the tax, and invest anywhere. They might be able to do a like-kind exchange if they sell real property. If you could address pros and cons of opportunity zone investments that might help. But, again, keep in mind that this is a general presentation of the issues to your various clients. You do not have a specific fact pattern to deal with.

Answer 1

A business memo is an informal and public communication intended for communicating regarding a topic to colleagues and employees of your organization.

• The format of the memo should start with the Date,To from and address and lastly the Subject, at the left hand upper corner and the document titled as Memorandum.
• The content of the Memo should be divided into introduction, body and summary and in this case the information will be on QOF or Qualified oppurtunity fund.
• Finally it is signed off at the end by a representative under a call to action statement.

The information that you will require for outlining the content about QOF is as follows:

QOF may be single asset or multi asset. It enables taxpayer discretion and control over investment decisions, may be associated with lower risk compared to any other funds.

QOF in year 1: has a tax basis of $0 that means OZ fund is sold in this year, then the investor would pay tax on $100X. In Year 5 , the fund is increased by $10x and if teh investor sells at this point, the tax that has to be paid is on $90x as 90% is deferred captial gains tax. Now in Year 7, the fund has increased by an additional $5x and if the investor ells the QOF, then tax is applicable only on $85X instead of $100x as 85% is the deferred captial gains tax.If the QOF is sold >10 years, then there is no taxes payable on the appreciation of the fund.

Hope this guides you in answering the question.