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What happens if I invest in a QOF, but they don’t deploy my funds before the testing period?


Answers
  • Donny Lucaj

    Donny Lucaj

    Plante Moran
    June 18, 2019

    This is a working capital safe harbor that allows for a QOF invested within an indirect method to qualify and meet the 70% tangible asset and 90% asset tests. If at any point the tests are not met, there is a penalty that is paid for failing the testing period. The penalty will vary depending on how severely the QOF missed the applicable test.

  • Steven Schneider

    Steven Schneider

    Baker McKenzie
    June 15, 2019

    The next set of regulations is intended to address questions like this that are relating to disqualification and penalty considerations, but the short answer is that if the intended QOF does not qualify as a QOF, then the risk to you is that you will not receive the intended tax benefits. Thus, buyer beware.

  • Matthew Rappaport

    Matthew Rappaport

    Falcon Rappaport & Berkman
    June 13, 2019

    If you invest in someone else's QOF and it's taxed as a partnership, you'll be responsible for your distributive share of all penalties, so do your due diligence carefully.

  • Erik Kodesch

    Erik Kodesch

    Lane Powell
    June 12, 2019

    The QOF will not satisfy the 90% qualified asset test and penalties apply. Basically, interest in the tax deferred by rolling the gain into a QOF. However, there could be other issues depending on why the QOF did not deploy the money.

  • Peter McNeil

    Peter McNeil

    Comprehensive Financial Solutions and Tax
    June 12, 2019

    In the event you fail the self-certifying test, the fund is subject to a penalty on a monthly basis for the shortfall. The penalty is 0.417% a month for the shortfall in qualified assets. If the shortfall is $1 million, then there would be a penalty of $4,170 a month. The fund will incur this penalty. You as the investor will proportionately be subject to this penalty as an expense against income. The penalties will end once the shortfall is cured. In the event that the fund can never qualify, any tax deferral that was utilized will be clawed back and the deferred tax will be due. Any future gains if help 10 years will not get tax-free status.

  • Blake Christian
    June 12, 2019

    First off, if you establish an entity under the QOF to be a QOZ business and develop a business plan, you can fall under the 31-month working capital safe harbor rule and minimize any penalties. The penalty for not deploying the funds is currently 6.5% annually.