Taxable sale then it has to reinvest the money in other qualifying assets.
Answers
A QOF can sell assets just as any other entity can sell assets. However, there are special rules and considerations once you sell assets in the fund for the investors to make sure they preserve the tax benefits of the program.
A chief benefit of the Qualified Opportunity Zone (QOZ) program is that if an investor holds a QOZ interest for 10 years, the taxpayer will recognize no tax on the appreciation of the investment. This is accomplished through a basis step-up in the qualified opportunity fund (QOF) interest to FMV immediately before the sale. The Internal Revenue Code provides that upon a QOF investor’s sale or exchange of its QOF interest, the QOF investor will not recognize gain provided that the QOF investor held its interest in the QOF for at least 10 years. The Proposed and Final Regulations also require that the QOF investor disposal of its QOF interest on or before December 31, 2047. The gain is eliminated if the QOF investor elects to step-up its tax basis for its QOF interest to its fair market value immediately before the sale. The Final Regulations expand the 10-year benefit available to a pass-through QOF owner. A qualifying investor in a QOF that has held its interest in the QOF for at least 10 years may exclude gain by the QOF on the sale of QOZBP or an interest in a QOZ business and gain on a sale by a partnership QOZ business which is owned by the QOF. In addition, the Final Regulations provide that the qualifying investor will not recognize any recapture income which otherwise would be ordinary income. A qualifying investor will recognize ordinary income from the sale by the QOF or by its pass-through QOZB of inventory. If a QOF or QOZB sells an asset resulting in again that a qualifying QOF investor elects to exclude and the QOF does not distribute the proceeds of such sale to the qualifying investor, the Final Regulations treat the qualifying investor as having received a distribution of the proceeds and recontributed those proceeds as a capital contribution to the QOF as a nonqualifying investment, creating a mixed fund investment for the investor. It is unclear how this deemed distribution/recontribution regime impacts an investor’s ability to exclude gain on the sale by the QOF or QOZB of assets acquired before such sale.
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