How can I decline a tax deferral but still get step up in basis on new gain?

Answers

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  Marko Belej

  Taft

  March 15, 2021

  It does not appear that a taxpayer can receive the basis step-up in a QOF after a 10-year hold unless he/she has elected to defer the gain invested in the QOF. In addition, a taxpayer will also lose the 10-year basis step-up to the extent that there is an inclusion event with respect to the QOF interest, other than certain inclusion events that result from distributions in excess of basis from QOF partnerships or QOF corporations. Under these rules, you may be able to invest your deferred gains in a QOF partnership or QOF corporation and then take out a distribution that triggers an inclusion event (but does not upset the basis step-up after 10 years). The tricky part is that some period of time may need to elapse to avoid the disguised sale rules (in the case of a QOF partnership) and economic substance doctrine (relating to circular cash flows).

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  Matt Campbell

  Hall Estill

  March 16, 2021

  An amended return should be filed to capture the deferral.

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  Valerie Grunduski

  Plante & Moran, PLLC

  April 26, 2021

  While I cannot claim to understand the rationale, the OZ deferral benefits (including the 10+ year step up in basis) is only available to those investors who elect to defer their capital gains via investment in a QOF. If you have already filed the return tax on these capital gains, you can pursue an amendment to treat your investment as qualified. As an aside: It is notable that there are a number of inclusion events that might later require your gain to be subject to tax prior to 2026, but still preserve the 10-year hold benefit.

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  Matthew Rappaport

  Falcon Rappaport & Berkman

  March 18, 2021

  If you are keen on paying the taxes now, you can defer the gains but then trigger an inclusion event voluntarily, right after the deferral. In essence, the "deferral" might last a few days or months, but the taxes will still be payable in 2021. If you're looking to get QOZ benefits but pay 2019 or 2020 rates on the capital gains, I do not believe that is possible under the OZ rules.

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