The person who inherits the investment inherits it as if they were the initial investor. In other words, everything goes through to the children with no problem. I am not a tax expert so you must confirm this with your CPA.
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What happens with the OZ benefits if an investor of a QOF die and the assets are passed down to the investor’s children?
Would an investor’s death be considered an “inclusion event” or would the children be able to reap the benefits of the OZ tax deferral?
Answers
Under the regulations, death is not an inclusion event. The attributes are carried over to the decedent's heirs.
Transfer upon death are not considered an inclusion event. A decedent's heirs inherit the OZ interest with the same basis as the decedent (no step-up upon death), and are liable for tax on any deferred investment in 2026. Heirs also get the benefit of the decedent's prior holding period, which tacks onto their own with regard to qualification for the 10% and additional 5% reductions in tax and the step-up to fair-market value at sale after 10-plus years.
Death is not an inclusion event. The beneficiaries would step to the shoes of the decedent. Therefore, kids would get same benefits and obligations as the original taxpayer.
The heir would step into the shoes of the fund investor. The code specifically notes the original invested capital gains are treated as income with respect to the decedent (IRD), so the same tax event in 2026 (or earlier if the heir sells the investment earlier). The proposed treasury regulations do specifically provide that death is not an inclusion event, where as other disposition events like a gift do result in inclusion of tax at the time of the disposition. Specifically, the regulations state “neither the transfer of the qualifying investment to the deceased owner’s estate nor the distribution by the estate to the decedent’s legatee or heir is an inclusion event.” Thus, the heir steps into the shoes of the decedent and receives the QOZ tax benefits, as long as the holding period requirements are met.
Death is not an inclusion event. Kids inherent all the benefits There are some very interesting planning ideas around that.
OF interests can be passed on upon death without creating an inclusion event. This is a topic to discuss with an attorney so it is structured properly.
An investor's death is not considered an inclusion event. Essentially, the beneficiaries step into the shoes of the decedent. You should confirm this answer with your tax advisors.
If the owner of an investment in a QOF were to pass away, it would be the shared or partnership interest in the QOF, and not the assets of the QOF, that gets passed on to the heirs. Transfers by death do not trigger a taxable “inclusion event.” In the case of an investment in a QOF purchased with deferred gain, upon the investor’s death the heirs step into the shoes of the decedent. The deferred gain is not eliminated for the heirs, and they are eligible for the same benefits as the decedent (e.g., no tax on future appreciation if the tacked holding period for the QOF interest exceeds 10 years, with the estate’s holding period being added to the holding period of the decedent). This tax treatment represents a departure from the general rule that provides for a step-up in basis of a decedent’s assets. In the case of an investment in a QOF that was not purchased with deferred gains, there are no OZ benefits to begin with, so no the general rules apply and the heirs do receive a step-up in basis.
The death of an OZ investor will generally not trigger an inclusion event. The beneficiaries will step into the decedants' shoes and take on their date-of-death tax basis. If the decedent dies before Dec. 31, 2026, then the beneficiaries will end up reporting the remaining deferred tax gain and after 10 years will be eligible for gain exemption.
This will not be a triggering event. The regulations state: "Most transfers by reason of death will terminate the owner's qualifying investment. For example, the qualifying investment may be distributed to a beneficiary of the owner's estate or may pass by operation of law to a named beneficiary. In each case, the owner's qualifying investment is terminated. Nevertheless, in part because of the statutory direction that amounts recognized that were not properly includible in the gross income of the deceased owner are to be includible in gross income as provided in section 691, the Treasury Department and the IRS have concluded that the distribution of the qualifying investment to the beneficiary by the estate or by operation of law is not an inclusion event for purposes of section 1400Z-2(b). Thus, the proposed regulations would provide that neither a transfer of the qualifying investment to the deceased owner's estate nor the distribution by the estate to the decedent's legatee or heir is an inclusion event for purposes of section 1400Z-2(b)."
An investor’s death would not be considered as an “inclusion event,” according to the summary and regulations set forth below. Most transfers by reason of death will terminate the owner’s qualifying investment. For example, the qualifying investment may be distributed to a beneficiary of the owner’s estate or may pass by operation of law to a named beneficiary. In each case, the owner’s qualifying investment is terminated. Nevertheless, in part because of the statutory direction that amounts recognized that were not properly includible in the gross income of the deceased owner are to be includible in gross income as provided in section 691, the Treasury Department and the IRS have concluded that the distribution of the qualifying investment to the beneficiary by the estate or by operation of law is not an inclusion event for purposes of section 1400Z-2(b). Thus, the proposed regulations would provide that neither a transfer of the qualifying investment to the deceased owner’s estate nor the distribution by the estate to the decedent’s legatee or heir is an inclusion event for purposes of section 1400Z-2(b). Similarly, neither the termination of grantor trust status by reason of the grantor’s death nor the distribution by that trust to a trust beneficiary by reason of the grantor’s death is an inclusion event for purposes of section 1400Z-2(b). In each case, the recipient of the qualifying investment has the obligation, as under section 691, to include the deferred gain in gross income in the event of any subsequent inclusion event, including for example, any further disposition by that recipient.
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