How To Fill Out IRS Form 8997 (For OZ Investors), With Ashley Tison

Under the opportunity zones (OZ) incentive, taxpayers can defer taxes by reinvesting capital gains from an asset sale into a qualified opportunity fund. To do so, IRS Form 8997 must be filed by all taxpayers holding a QOF investment. Guidance on how to fill out this form will eliminate inconsistencies prior to submission.

Ashley Tison is an Opportunity Zone consultant and attorney based in Charlotte, North Carolina. Along with Jimmy Atkinson, he is co-founder of OZ Pros, an Opportunity Zone advisory firm.

Click the play button above to listen to my conversation with Ashley.

Or, for the video recording, click here.

Episode Highlights

  • How an QOF uses Form 8997 to inform the IRS of the QOF investments.
  • Key factors to consider with filling out OZ-related tax forms.
  • How to interpret OZ-tax related forms.
  • K-1 tax forms for ETFs and ETNs and how they are work.

Featured On This Episode

Video Recording

Industry Spotlight: OZ Pros

Founded by Jimmy Atkinson and Ashley Tison, OZ Pros is an Opportunity Zone advisory firm that offers a simple document generation tool for quick and easy QOF and QOZB formation. OZ Pros also offers a customized done-for-you package as well and can assist with PPMs, subscription agreements, pitch decks, pro formas, business plans, and capital raising.

Learn More About OZ Pros:

About The Opportunity Zones Podcast

Hosted by OpportunityDb.com founder Jimmy Atkinson, The Opportunity Zones Podcast features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in opportunity zones.

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Show Transcript

Jimmy: Welcome to The Opportunity Zones podcast. I’m your host, Jimmy Atkinson. And today, I’m joined once again by my partner at OZ Pros, Mr. Ashley Tison. Ashley, how are you doing?

Ashley: Fantastic, Jimmy, thanks for having me on today.

Jimmy: Absolutely a pleasure. Ashley, always talking with you is a pleasure. And for our listeners out there who are listening to this on Apple Podcast, or Spotify, or wherever, if they’re listening to the audio-only version, a special note that this is actually a video podcast that we’re doing as well because Ashley is going to do his best John Madden impersonation and actually walk us through how to fill out some of these IRS forms as an investor in a qualified opportunity fund. So if you head over to opportunitydb.com/podcast, you’ll be able to find the video version of today’s episode with Ashley Tison. So, Ashley, let’s get the ball rolling here on investor requirements, limited partner requirements, someone who invests a good chunk of change into a qualified opportunity fund, and let’s assume that this investor is using capital gains money to do so. Which IRS forms does that investor need to be aware of and fill out either himself, or get getting advice, or preparation assistance from a CPA?

Ashley: I would highly, highly recommend that as we’re approaching this, and as we’re doing this that everybody out there actually gets professional advice, and from somebody who’s competent, and who has experience with opportunities on transactions. So, we’re gonna try to make it as simple as possible, so even your fifth grader could do these forms, but there are nuances to the calculations. And you wanna make sure that you’re taking into account those nuances, and that requires somebody who’s knowledgeable about opportunity zones. So, let’s caveat this whole thing with that, but jump right into it. So, as we’re coming into March 15th, right, and as we’re approaching that, typically, Valentine’s day is when people start thinking about taxes. They’re like, “Ow, man, you know, in the next month or two months, I’ve gotta file my individual stuff.” And if you’re an individual, you’re gonna be filing this with your individual tax return, or you’re going to be extending and then filing it once it’s extended. But we’re gonna go over both individuals, and then I think we’re gonna do a separate podcast to show what the actual fund would need to do for those folks who have their own captive funds.

Jimmy: That’s right, Ashley. So yeah, this episode today is gonna be focusing on IRS form 8997, which pairs up very nicely with IRS form 8949 for the investor inside of a qualified opportunity fund. Our next episode will focus on IRS requirements for the qualified opportunity fund operators themselves and how they can fill out form 8996. That’ll be on the next episode. But, Ashley, go ahead when you’re ready, walk us through form 8997.

Ashley: So, what we’re gonna do first, this is the handy-dandy opportunity zone cheat sheet. And I think it’s beneficial for everybody to…for us to start here because I think it gives, kind of, a visual conceptual idea about what’s exactly going on here. So, you gotta start with a capital gain, right, from a sale to an unrelated party, and you gotta drop that into a qualified opportunity fund within 180 days. Well, the way that you let the IRS know that you are doing that, so the form that starts the whole process is form 8949. So, form 8949 is where… And I’m actually gonna get out of this, and I’m gonna go back to my actual form because I want to be able to show people and be able to, kind of, zoom in, and it’s a lot easier to do this than it is inside of the actual PowerPoint presentation. But inside of 8949, this is gonna be a consolidation of all of your capital gains that you’ve had over the year. And it’s gonna show what you sold right here, so it would be like Amazon stock, right? And then you’re gonna show the date acquired. You’re gonna show the date sold, what the proceeds were, what your cost basis was as well.

Jimmy: And this form, just to interrupt there for a second because I love interrupting you, this form precedes the opportunity zone program. This just applies to any capital gains that you ever have irregardless of whether or not you invest in an opportunity zone fund, is that right?

Ashley: That’s correct. And so, what the IRS did was they said, “Okay, people are used to filling this out, and they’re actually…” So, this would actually be in this page is for short-term funds, right on part one, part two is on long-term. And so, more often than not people are gonna be showing, and most investors I think are investing long-term capital gains, but you can invest short-term as well. And so, if it’s short-term, it’s gonna be part one. If it’s long-term, it’s gonna be part two. But inside of this, this is where you fill it out, specifically on this page. So the description of the property, you know, like, stock, or whatever. So, it’d be Amazon stock, the date that you acquired it, the date that you sold it, what the proceeds were, what your cost basis was, and then a code from any instruction on any adjustment that’s gonna happen.

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And this is where you’re gonna put Z, right here, okay? And so, then you’re gonna have your ultimate gain over here. So, let’s say that you made $1 million on Amazon stock. It’s gonna show $1 million right here. And then directly underneath that, you’re going to put the EIN of the QOF you’re going to be investing in. And so, when the IRS sees an EIN directly underneath this and correspondingly a negative number, they are going to know that you invested into a qualified opportunity fund. And you’re gonna indicate the date that you acquired the opportunity fund and, you know, you won’t have a sold date because you’re still gonna own it. And then ultimately, you can disregard this piece and this piece, you’re gonna put a Z right there as well. And you’re gonna put a negative number for however much you want to defer of that original gain in this amount.

So, if you wanted to defer the entire $1 million by investing that into your opportunity fund or an opportunity fund, you’re gonna put a negative $1 million, right here, okay? And so, that’s going to show, and then ultimately, that’s going to get reflected down here at the total where you’re gonna enter in how much capital gains you still owe. So, if you only deferred a portion of it then, right, so let’s say you only did $500,000 right here then you would have a $500,000 down here. That’s where you put and that’s how you start the process as an investor with form 8949. Any questions, Jimmy?

Jimmy: No. I think that’s pretty straightforward. And that’s just for any capital gain, whether or not you’re going to defer it into an opportunity zone fund, you’re always using that form. We’ve been using that form for years and decades probably if I had to guess. I’m not a CPA, but I think we’ve been using that form for a very long time. So, then you have your capital gain recognized on that form, and you say you’re gonna defer some of it into an opportunity zone fund. So, then what form you need to fill out to, you know, further validate that is form 8997, is that right, Ashley? And walk us through that one.

Ashley: That’s exactly right. So, 8997, you’re gonna have your name up here, and this is basically, your initial and annual statement of qualified opportunity fund investments. So, on your first year deferring, right, if you never defer again where you roll a capital gain, you won’t fill out 8949 ever again, but you’re gonna fill out 8997 for as long as you have that opportunity zone investment. And so, on the 8997, you’re gonna put your name right here. It’s just like, you know, you’re, back in kindergarten or, you know, on your SAT. And you do not get credit for putting your name in, by the way. You actually gotta do the whole form correctly. And then you’re gonna put your tax identification number up here. Then part one is total QOF investments holdings due to deferrals prior to the beginning of the tax year.

So if you had deferred for 2020, and you already had put money into a fund, this is where you would say what your holdings were prior to this current tax year. Since we’re doing this for folks that probably invested in 2021, you know, that’s gonna be blank. Part two is current year capital gains deferred by investing in a qualified opportunity fund. And so, you’re gonna list the EIN of the fund that you deferred into. You’re gonna put the date when you put your investment into the fund, so, in this case, somebody invested on January 1st, 2020. And then you’re gonna show what you got, right, a description of the interest acquired. And so, in this case, this person got a 99.99% interest in their QOF. And then on your… You’re gonna indicate right here, the amount of the long-term deferred gain remaining in the QOF at the end of the year, right?

So, this will be the deferred gain relative to, like, if it was short-term gain or if it’s long-term gain. And in this case, we took that $1 million of Amazon stock and the gain that we got from that Amazon stock on a long-term basis, and we put the $1 million, right here. And then you’re going to total these up, down here at the bottom, and you’re gonna enter the totals from both this, from your short-term and your long-term over here, over an F. So, now, on this specific part down here, are you a foreign eligible taxpayer, and we could go into the details of that. Most people that we’re talking about are not that, but if somebody’s got a specific question about that, we’re definitely willing to walk through that in further detail, either on a strategy call or we can plug you in with a tax professional who can assist with you. Same thing on this, you know, the waiver of benefits, right, more than likely, you’re probably not gonna be filling that out.

So, then in part three, this would be if you actually distributed money out of your QOF, or if you received an inclusion event from a fund that you invested in. And so, you would report that here, this would basically be cash that you’re pulling out of a fund. You’re gonna report that in part three here. And then part four is gonna indicate effectively your net, right? So, you’re gonna total up and balance out the initial money that you had at the beginning of the year, the stuff that you added during the year, the stuff that you subtracted, right, from any inclusion events, and then you’re gonna total that up right here, all right? And so, then you’re ultimately gonna have your totals down at the bottom. And so, that’s form 8997, and it’s fairly simple and fairly straightforward, but if people have any questions, once again, happy to set a strategy call, happy to jump into details of their particular situation, and to run through those to make sure that nobody has any questions.

Jimmy: It looks pretty straightforward, Ashley. Thanks for walking us through that. I do have a couple of questions for you. Does the qualified opportunity fund issue any sort of document or documentation to the LP to help him fill out that form? Or is it something that you have to keep your own records on? Is it, like, similar to receiving a 1099 or something like that, where you have some sort of official document from the company?

Ashley: So if I were a fund and I were raising money, I would be sending this video to my clients, right, with the information that they’re gonna need in order to fill this out, right? So, the most important thing is that they’re gonna need the EIN of the fund that they invested in, and more than likely, that’s probably gonna be on lots of documentation that they’ve gotten.

Jimmy: Yearly, you get some sort of statement, year-end statement, that that will show you the balance in your account, and it’ll have the EIN of the fund on there, but if not, you can always, or you should be always, I should say, send your fund manager an email, or give them a phone call and ask them, you know, they’re required to give that information over to you.

Ashley: That’s right. And, I mean, they’re also gonna give a K-1. The K-1 is gonna have and, specifically have the EIN on the K-1. But the question is when does a K-1 come? Because a lot of times there can be some delays on getting that out and delays on receiving it. We won’t even hit the issues with the post office right now, but ideally, your fund is delivering those to you electronically through a portal or something like that. And you’ve got your K-1 in hand, and from the K-1, you’ll be able to pull this information that you need for these forms. If not, to your point, just give them a call and grab that info from of them.

Jimmy: Yep. The K-1, you can expect the K-1, that’s a good point, Ashley, probably from, I would guess 90% or more funds will be issuing Schedule K-1. There’s a handful of funds that are structured differently and don’t issue K-1s, they’ll issue a 1099 instead, is that right?

Ashley: That’s true.

Jimmy: So, if you get a 1099 and not a K-1, that’s okay. That just means your fund is structured a little bit differently than the K-1 funds.

Ashley: Yeah. And in that case, what you would do is you would inside of here, instead of having whatever percent interest you have inside of the partnership, you’re gonna list how many shares of stock you have, and then that’s gonna delineate what you’ve got. And to that end, if your fund, and you’re invested into a C corporation that does…you know, there’s gonna be an issue in 1099s, you may or may not receive one the first year. And so, if you don’t get anything, just reach out to your investor relations contact at your fund.

Jimmy: And this is required to be filed with your taxes every single year that you’re invested in the fund, right?

Ashley: That’s correct.

Jimmy: Just wanted to drive that point home, again. And what is the due date for this? Is it April 15th or I guess October 15th, if you extend?

Ashley: That’s exactly right. It’s with your timely filed tax return. And so, if you extend, then your tax return is gonna be timely filed whenever you extend to, which would be October 15th for most people, if they file an extension.

Jimmy: Sounds good. What about a different case where it’s not an individual who has invested in the qualified opportunity fund? What if you’re invested through your corporation or your partnership LLC, or some other legal entity like that? Do you still fill out form 8997?

Ashley: That’s correct. You’re gonna fill that out, but you’re just gonna put the name of the company up here and the EIN of the company instead of your social security number.

Jimmy: Okay. So, similar process, and then that due date for a partnership, in particular, might be sooner, right? I think that’s March…

Ashley: That’s true. That’s gonna be March 15th, right? More than likely, if you made an investment through your company, you’re probably going to be extending it. And so, then it would be, you know, with the timely filed extension.

Jimmy: Very good. Okay. Well, I think I’ve hammered you with as many questions as I have about form 8997. Let’s wrap up the episode here. If anybody has any questions on how to fill this out or wants to get different strategic advice from you, Ashley, regarding opportunities zone investing, where can they head to learn some more?

Ashley: So, ozpros.com is a fantastic resource, and we’ve got lots of videos, and we’ve got lots of information that’s on there. We also have a really cool online community where we’ve got, you know, over 250 people now that are sharing information, they’re sharing thoughts, strategies, that kind of thing, and kind of coming alongside of each to help out. That’s called the OZworks Group. So, if you just go to ozworksgroup.com, you can join up there. That’s a paid membership on a monthly basis. And then we’ve also got the OZ Pros Insider Access. We refer to it in-house as the compliance boot camp, but effectively, it’s a weekly call with me and with some other OZ professionals where we specifically go through answers to questions just like this, whether it’s forms, or whether it’s strategy, or whether it’s technique, we unpack those on a call that’s every Tuesday at 10:00. We have a bunch of people that come into there, and usually, I have some lively discussions and some really good information that comes out as a result of those calls. All of those are actually administered through the OZworks Group. So, we’d be happy for you to join either one of those or both, and or to set up a strategy call. And we can also plug you in with great opportunity zone professionals from across the country, through the relationships that we’ve been able to develop.

Jimmy: That’s fantastic. Thanks, Ashley. So, again, that’s [email protected], if you wanna reach out to Ashley and schedule a strategy call with him. Or if you wish to learn more about the community of opportunity zone participants and stakeholders and investors and fund managers, and deal sponsors that we’ve pulled together, that’s [email protected] And for listeners out there today, as always, I will have show notes for today’s episode at opportunitydb.com/podcast. There, you can find all of the links to the resources that I discussed on today’s show with my guest, Mr. Ashley Tison. Ashley, it’s been a pleasure. Thanks for joining me today.

Ashley: Thank you, Jimmy. It’s always a pleasure being a guest on your show, and I look forward to doing it again.