IRS is giving you more time to invest in this new tax-advantaged strategy

Investors who were sitting on the sidelines during coronavirus will get some more time to partake in a new tax play.

Qualified opportunity funds were created by the Tax Cuts and Jobs Act of 2017.

They offer taxpayers an incentive to invest capital gains they incur elsewhere into economically distressed communities, granting investors an attractive tax break if they remain in the fund for at least five years.

Investors have poured more than $10 billion into the 406 qualified opportunity funds listed on the Novogradac Opportunity Funds List as of April 30. That’s up from $790 million invested in May 2019.

The coronavirus pandemic has led to prospective investors slowing down and carefully kicking the tires on these projects before they invest for years at a time, said Richard LaFalce, partner at Morgan Lewis in Washington, D.C.

“What I have seen is that people are focused on making sure it’s still a good underlying investment,” he said.

The IRS is also willing to give investors more time due to coronavirus, according to an announcement the agency released on Thursday.

Normally, prospective investors have 180 days from when they incur significant capital gains – perhaps by selling a business – to reinvest the money into a qualified opportunity fund.

Now, investors whose 180-day period would have ended after April 1 will have until Dec. 31 to reinvest their proceeds into one of these funds, the IRS said.

The longer you hold the fund, the sweeter the tax break.

Stay in your qualified opportunity fund for more than five years, and you’ll be able to exclude 10% of the originally deferred gains you invested.

Hold the fund for at least 10 years, and you won’t owe taxes on the fund’s appreciation once you sell your stake.

As attractive as the tax benefit may seem, pouring money into a qualified opportunity fund isn’t for everyone.

For starters, many projects are based on real estate, so there’s some element of illiquidity. Investors in today’s economic tumult might be hesitant to sock away cash into a project for years at a time.

“It’s a long-term strategy – a 10-year strategy,” said LaFalce. “People expect we will have a long-term recovery, which is why these projects continue to move along.”

These funds also have layers of expenses, including selling commissions, managing dealer fees and other costs.

Finally, investors could face unexpected tax-planning consequences if they don’t bring an accountant and a financial advisor into the mix.

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