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  • Writer's picture Treavor Dodsworth CFP®, CPA, CKA®

#108 - Let's Save Some Taxes

Let's Save Some Taxes

Today, I wanted to introduce investing in Qualified Opportunity Funds. It is a tax-efficient investment opportunity that won’t apply to all but for some, it could have a significant impact. Quick note: Individuals invest in Qualified Opportunity Funds which invest in Qualified Opportunity Zones. At least part of the benefit of them is freeing up so-called "Warehoused Capital." There are likely many investors out there who are holding on to investments not necessarily because they love the investment but because they don’t want to generate capital gains by selling. At the same time, there are areas of the country that the government thinks could benefit from some capital infusion. This is one area where Qualified Opportunity Funds can come into play. The government provides tax benefits to spur investment into Qualified Opportunity Zones. So what are the tax benefits:

  1. There are two benefits that apply to the capital gains you would be generating by moving out of your current investment. First, you are able to defer that gain until the Qualified Opportunity Fund is sold/exchanged or December 31, 2026, whichever is earlier. Second, you are able to increase the basis of the Qualified Opportunity Fund by 10% of the original gain invested if you hold the Qualified Opportunity Fund for 5 years (if acquired by December 31st, 2021).

  2. This next tax benefit applies to gains that you incur by owning the Qualified Opportunity Fund. If you hold the Qualified Opportunity Fund for at least 10 years, you can elect to have the basis increase to the fair market value when you sell it and effectively eliminate taxable gain (at least on the portion attributable to the prior gain). This benefit lasts through 2047 so really you could potentially have this apply to a much longer growth period than 10 years.

Qualified Opportunity Funds are very complex and this is not a recommendation to buy or sell. There are many different dates at play so being aware of when things are expiring is paramount. Please do your own due diligence before pursuing as there are many different questions to be asked. For example, how is the Qualified Opportunity Fund treated at death compared to my current investment? Despite their complexity though they could make a significant difference for the right investor due to the tax savings. Though, before I leave, I must say despite the potential tax savings, an investor should still evaluate the underlying investment and not "let the tax tail wag the dog."


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