Qualified Opportunity Funds (QOFs)

Definition

A qualified opportunity fund is an investment vehicle, organized as a corporation or partnership, that holds at least 90 percent of its assets in qualified opportunity zone property; investors who put capital gains into one within 180 days can defer tax on those gains and, after ten years, exclude its appreciation.^[1] For amounts invested after December 31, 2026, the deferral runs five years from the investment date instead of to a fixed date.^[2]

Federal law

1. Tax Cuts and Jobs Act (popular name), Pub. L. 115-97, § 13823, 131 Stat. 2183. Created qualified opportunity zones and qualified opportunity funds (26 U.S.C. §§ 1400Z-1, 1400Z-2), including the 90 percent asset test, 180-day reinvestment window, and 10-year basis rule. Official text: govinfo.gov, U.S. Government Publishing Office.
2. One Big Beautiful Bill Act (popular name), Pub. L. 119-21, § 70421, 139 Stat. 223. Made the opportunity zone program permanent with decennial designations and rewrote the deferral rules (five-year rolling deferral, 10 percent basis step-up) for amounts invested after December 31, 2026. Official text: govinfo.gov, U.S. Government Publishing Office.

How it works

Congress created qualified opportunity funds in section 13823 of the Tax Cuts and Jobs Act. The law defines one as an investment vehicle "organized as a corporation or a partnership for the purpose of investing in qualified opportunity zone property" that "holds at least 90 percent of its assets in qualified opportunity zone property."^[1]

The 90 percent test is not measured on a single day. It averages the fund's holdings on two dates: "the last day of the first 6-month period of the taxable year" and the last day of the taxable year.^[1]

Tax treatment for the investor

The benefit belongs to the investor and grows with the holding period. The rules depend on when the money went in.

• As enacted in 2017: the deferred gain is included in income on the earlier of "the date on which such investment is sold or exchanged" or December 31, 2026. Basis rises by an amount "equal to 10 percent of the amount of gain deferred" after five years, and by another "5 percent of the amount of gain deferred" after seven.^[1]
• Held at least ten years: the investor may elect a basis equal to "the fair market value of such investment on the date that the investment is sold or exchanged."^[1]
• For amounts invested after December 31, 2026, section 70421 of Public Law 119-21 rewrote these rules: inclusion moves to the earlier of the sale or "the date which is 5 years after the date the investment" was made; the five-year increase is 10 percent, or "30 percent in the case of any investment in a qualified rural opportunity fund"; and the ten-year election uses fair market value at sale only "in the case of an investment sold before the date that is 30 years after the date of the investment."^[2]

Why it is a deployment opportunity

The fund lets an investor put realized gains to work in designated census tracts, with tax benefits that grow the longer the investment is held. "Qualified opportunity fund" describes the vehicle. It does not settle whether a particular investor, gain or project qualifies; each is tested under its own rules.