What Investors Must Know About IRS Forms 8949 & 8997

Tax season is upon us. Whether you plan to file your tax return before April 15th, or if you plan to file an extension, the time to think about what you need to do to maximize your tax benefits is now. If you invested in Opportunity Zones in 2021 or earlier, there are two forms you will need to fill out and include in your tax return to properly defer your capital gains. Your inclusion of IRS forms 8949 and 8997 will begin with the tax year the capital gain you are investing in a Qualified Opportunity Fund (QOF) was realized and continue through the year you dispose of your investment. This means you will likely be using these forms for at least 10 years, so pay attention. In this article, we will go over the purpose of each of these forms and provide simple guidance on how to properly complete each form in simple circumstances. 

Form 8949: Sales and Other Dispositions of Capital Assets

IRS Form 8949 is the mechanism to actually defer the capital gain that is invested in the Qualified Opportunity Fund. To start, you will need to list the employee identification number (EIN) for any and all QOFs you’ve invested in under ‘description of property’ in column (a). The dates of the investment(s) must also be listed in column (b), with the amount of the deferred gain, listed as a negative number in column (h). You will also list the information about the disposal of the property that brought you the gain you are investing in an Opportunity Zone. In our simplified example below, we are selling Tesla stock bought in 2018:

Figure A: An example of the capital gain event and original QOF investment as line items in form 8949 Column Part II.

If you dispose of an investment in a Qualified Opportunity Fund, or receive a distribution of funds larger than the basis, you will be triggering what is called an inclusion event, or a partial inclusion event. This means that the previously deferred capital gain needs to be included on form 8949, by selecting box (C) in Part I if the gain is short term (held for 1 year or less) OR by selecting box (F) in Part II if the gain was long term (typically longer than 1 year). See below:

Figure B: Form 8949 Part I box (C) selected for a short term gain.

Figure C: Form 8949 Part II box (F) selected for a long term gain.

For each line item, you will be listing the description of the property (for QOFs, this should be their EIN) in column (a), the date it was acquired in column (b), the date the property was disposed of (if applicable) in column (c), the proceeds (if applicable) in column (d), and the cost or other basis in column (e). Column (f) will need to be answered with a ‘Y’, and the amount of the previously deferred gain will be in column (g), this time as a positive number. As Opportunity Zone investments are meant to be long term in nature, it is unlikely that you will be disposing of these investments in the near future if your goal is to take advantage of the tax benefits. 

Form 8997: Initial and Annual Statement of Qualified Opportunity Fund (QOF) Investments 

As an OZ investor, you will be using IRS form 8997 to report 4 things to the IRS:

1. Your new QOF investments
2. Your deferred capital gains held at the beginning and end of this tax year
3. Capital gains you have already deferred via investment in a QOF in previous tax years
4. Any QOF investments you have disposed of during the tax year

There are three sections you would use to report these items on form 8997. 

Part I includes any gain-deferred QOF investments you made before the beginning of the current tax year:

Figure D: Part I of Form 8997

Your gain-deferred QOF investments made during the current tax year will be reported in Part II.

Figure E: Part II of Form 8997

Part III is where you will report any inclusion events related to your QOF investment(s). These include but are not limited to the sale or transfer of your QOF interests, or if you receive a disbursement larger than the basis of the investment. A complete list of occurrences that are designated as an inclusion event can be found in the Treasury Regulation Section 1.1400Z2 (b)-1(c )

Conclusion

While many of us hire professionals to handle our taxes, it is still  important to have a basic understanding of the tax forms needed to defer your capital gains with OZ investing. Keep in mind, you and/or your tax preparer will need to continue to complete these forms year after ear until your QOF investment is complete and disposed of. If you have any questions about this or other matters involving OZ investing, reach out here. We would love to hear from you and offer our OZ expertise. 

OZ FundHub is not a licensed distributor of financial products. All information contained on OZ FundHub is for educational purposes only and should not be interpreted as investment advice. Any and all investment decisions should only be made after having performed significant due diligence and with the understanding that investments are made at your own risk.