You need to hold the QOF interest for at least 10 years.
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Does my money actually have to be invested for a full 10 years to get a step up in basis for the appreciation tax benefit?
Does my money actually have to be invested for a full 10 years to get a step up in basis for the appreciation tax benefit? What if it’s only invested for 5 years? Do I get a step up in basis regardless?
Answers
Yes; what else if not your money?
There are two tax benefits. One, you defer the gain on any capital gains till Dec. 31, 2019, or the date you sell your Opportunity Zone investment. If you hold for five years, only 90 percent of deferred gain is due. If you hold for seven years, 85 percent of gain is due. In either case, if the investment made money, you pay tax on the gain. Second, the other benefit is that the entire gain on the Opportunity Zone investment becomes tax-free if held for 10 years. You still pay the deferred tax in 2026, but the gain on new investment is tax-free.
You will get a 10% step-up after five years, but if you hold for less than 10 years, you will not be entitled to the full exemption.
To get a step-up in basis to match the capital appreciation of the OZ investment, the money must be invested for 10 years, but there are friendly rules governing cash-out refinances of OZ assets. If money is invested before Dec. 31, 2019, and is held in the QOF for seven years, the QOF interest gets a 15% step-up in basis. If money is invested before Dec. 31, 2021, and is held in the QOF for five years, the QOF interest gets a 10% step-up in basis.
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