Qualified Opportunity Zone Funds - Redemption and Reinvest

[DXS]

Hello all that are interested in this subject.  As concluded, Turbo Tax will not support these kinds of investments, and I had to use TaxAct Online.  I believe there is one other online company that can do them, but I do not know their name.

First of all, I am NOT a CPA but I am a retired Federal Auditor and familiar with the tax law.  As always, consult with your tax advisor, do not construe this to be "advice" for your circumstances. 

Ok, I got hit with a whammy.  I invest in a QOZ.  The company informed the investors that there are too many hoops to jump through on the construction projects which has been very frustrating.  So they are "Buying back" all the investments.  NOOOOOO!!!!  This will cause me a problem!  

I contacted two QOZ companies (Let's call them A and B) about "rollover."  Both companies said they were totally unaware of any "rollover" process.  And both companies were shocked that a QOZ company was going to "throw in the towel" and dissolve.  One of the two companies (B) said that they did have clients who had "voluntarily" taken a redemption due to dissatisfaction with the QOZ investment they had and then re-invested the proceeds with Company B.

The fund I invested in (Let's call it X) told me that the QOZ law allows one to take a redemption but you must reinvest within 12 months to keep the tax benefits.  I haven't verified that this is true or not, but my question on this is....

1. If you take a redemption and re-invest, do you get to keep your original investment date on your forms, because if I re-invest now, I will lose the 10% exclusion (I didn't qualify for the 15% exclusion) when I have to claim them in 2026 (and all companies I talked to know there is a pending law change in Congress to extend this to 2028...). 

2.  I am not sure TaxAct Online or even any software used by CPA's have a way to show your investment redemption and reinvest. 

And even if I do have 12 months to reinvest, I need to do it by year end this year or I will have to claim gains and then amend after I did a reinvest later.  Right now the IRS is SO DUMB that doing a 1040X will get you in big trouble even if you know what you are doing.  I had this problem when I tried to do a 1040X recently.  Took me three months to convince the IRS I was right.  Once they agreed I was right they changed their numbers to match mine and decided not to charge me interest even though technically they could have. 

If anyone is interested in this topic, I will try to keep updated when I find out more.  I feel that even with TaxAct I am going to have major issues trying to do the 8949 and 8997 for 2023 because I have to redeem a QOZ and reinvest it. 

[tagteam]

Have you read through the Regs?

https://www.law.cornell.edu/cfr/text/26/1.1400Z2-0

[DXS]

The regs don't really address my situation, which is the QOF I invested in is buying back all the investments.  I wanted to "roll it over" but the QOF companies I called have no clue how to do a "rollver" and are not aware that you can or cannot "rollover."   A "rollover" is when you do not touch the money.  One company only knew how to reinvest a redemption.  But if you reinvest a redemption, do you get to keep your original investment dates to qualify for the 10% or 15% exclusion when you have to claim it in 2026?  (might be changed to 2028, all companies I talked to are aware of pending legislation)  And how do you report that on the Form 8997? I think it has to show on the 8949 first, but can you do the Z code and make it show as a redemption from original but invested in new?

[DXS]

Ok, I have done some more research.  Again, I am not a CPA, just a retired Federal Auditor who understands the tax law.  Check with your tax professional.  But here is what I found.

The IRS rule is that if your QOF liquidates before December 31, 2026 (as mine is going to), then your deferral period ends.  You are hosed and have to claim the gain.  BUT!  There's more!

You CAN.... "redefer."  You have 180 days from the date your QOF is liquidated to re-invest.  BUT!  Your 10 year holding period begins the date you "re-defer."  And the bad news.  If you previously qualified for 15% exclusion (holding it 7 years) or a 10% exclusion (holding it five years), then you will lose those exclusions.   Because your "re-deferral" date will be, oh, now, and between now and 2026, not long enough to qualify.  BUT!!!!  There's more.

There is a bill pending in Congress to extend the date to 2028.  The couple of companies I talked to for re-investing are confident the bill will pass (barring any more Speaker of the House issues!!!!).  So..... if you are in the situation I am in (where your QOF is liquidating early), you will lose your 15% exclusion, but if you re-invest before the end of 2023, you may barely squeak by to qualify for the 10% exclusion (holding for five years).  

I got in too late to qualify for the 15% exclusion but I was eligible for the 10% exclusion.  So for me it's crossing the fingers and hoping the law is extended so I can still get my 10% exclusion. 

[Rick19744]

TT is a software aimed at the masses.

Your particular investment is not a typical investment, and TT does not support form 8997.

Here is a link to some commentary on the IRS website in case you want some quick links on this area.  Certainly not all-inclusive.

https://www.irs.gov/credits-deductions/businesses/invest-in-a-qualified-opportunity-fund#:~:text=To%....

[DXS]

Found out some more information.  If..... your QOZ is discontinuing and is NOT being bought out, you are hosed.  BUT! If another company is BUYING OUT your QOZ and taking over, you keep your original timeline.  And in the instructions for the Form 8997, the IRS makes it  clear how to show this, 

Beginning balance is Company A with that ID number that you started out with.

DO NOT show any "out and in" unless you actually did withdraw and invest other amounts. 

For the ENDING balance (provided you had no changes), you just change the name and ID number to COMPANY B but you say "Formerly Company A."  The company I am using for my taxes will automatically put Company A for "ending balance" but you are allowed to "over write" it.  It would also help to attach an explanation.  The company I am using allows explanations to be attached.