Tax

OBBBA Revives Your Ability to Kill Capital Gains with OOFs

Since 2018, taxpayers have enjoyed significant tax benefits by investing capital gains in Qualified Opportunity Funds (QOFs). QOFs channel money into Qualified Opportunity Zones (QOZs)—government-designated low-income census tracts. Investors have embraced the program, pouring in more than $160 billion.

The program was set to expire in 2026. However, the One Big Beautiful Bill Act (OBBBA) made the program permanent and adjusted the tax benefits.

New Rules Beginning in 2027

Starting in 2027, you can invest in a new set of QOZs that meet stricter low-income standards. Expect about 25 percent fewer QOZs than under the original program. 

Also, in 2027 and 2028, you can invest in the original QOFs and obtain the new QOF treatment. 

When you invest capital gains in a 2027-or-later QOF, within 180 days you unlock four major tax benefits:

  1. You avoid tax on your capital gains for five years.
  2. You get a 10 percent step-up in basis at the five-year mark, which eliminates 10 percent of your taxable gain.
  3. You owe no tax on the appreciation of the QOF, as long as you hold the QOF investment for 10 years before selling.
  4. You may keep your investment for up to 30 years and still avoid capital gains tax on any appreciation through the end of that year.

Qualified Rural Opportunity Funds

The OBBBA also created a new vehicle: the Qualified Rural Opportunity Fund. These funds must invest at least 90 percent of their assets in rural QOZs. If you invest capital gains in one of these funds, you gain a 30 percent step-up in basis after five years.

QOZ 1.0: The Original Program

The original QOZ program remains in effect through 2026. If you invest in 2025 or 2026, you defer tax on your capital gains only until December 31, 2026, when you must pay the tax on your 2026 return. You also lose the five-year, 10 percent step-up in basis. 

Still, the most powerful benefit remains: you owe no tax on appreciation if you hold the investment for 10 years. You can even hold it through December 31, 2047, without paying tax on appreciation.

A Word of Caution

Treat QOF investments with care. Before you commit money, make sure you feel confident about the fund’s management team, investment strategy, projected returns, and fees.

If you have any questions about QOFs, please call me directly at 408-778-9651

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