Taxpayers who invest qualifying capital gains in qualifying opportunity funds can potentially enjoy significant federal tax benefits. Among these benefits are the potential deferral of such capital gains until December 31, 2026 and the ability to completely avoid income tax on any accrued gains on the investment in the Qualified Opportunity Fund if the investment is held for at least 10 years. However, to qualify as a qualifying opportunity fund, an entity’s assets generally must have been acquired by purchase after 2017. Thus, without further structuring, a taxpayer who owns property in a qualifying opportunity area that bought before 2018 could not benefit from these rules.
However, in 2019, the Treasury Department finalized regulations that allow qualified opportunity funds to acquire leasehold interests in properties purchased before 2018 if the lease is on market terms, even if the interest on the property belongs to a related party. This is generally the case regardless of the extent to which the lessee improves the leased property. (However, if a taxpayer leases property from a qualified opportunity fund and the fund only makes limited improvements to the property, the transaction may fall under an anti-abuse rule, which allows the IRS to requalify transactions that fall outside the objectives of the Qualified Opportunity Fund Rules, which is to encourage new investment in Qualified Opportunity Areas.)