Qualified Opportunity Zones

The federal Tax Cuts and Jobs Act of 2017 (sec. 13823 of Public Law 115-97) created a federal opportunity zone program. Under this program, taxpayers may qualify for one or more of the following federal tax benefits:

• Defer Paying Tax on Capital Gains
  
  Taxpayers who meet the requirements under secs. 1400Z-1 and 1400Z-2, Internal Revenue Code (IRC), may defer paying tax on their capital gains by investing the gains in a qualified opportunity fund (QOF) as defined under sec. 1400Z-2(d)(1), IRC. The deferred gain must be included in income in the taxable year which includes the earlier of:
  
  
  • the date on which the QOF investment is sold or exchanged, or
  • December 31, 2026.
  
  
• Reduce the Taxable Amount of the Deferred Capital Gains
  
  Taxpayers who defer paying tax on their capital gains by investing in a QOF and hold the QOF investment for at least 5 years can exclude 10% of the deferred gains from taxable income. Note: To qualify for this federal tax benefit, the QOF investment must have been made prior to January 1, 2022.
  
  Taxpayers who defer paying tax on their capital gains by investing in a QOF and hold the QOF investment for at least 7 years can exclude an additional 5% of the deferred gain from taxable income. Note: To qualify for this federal tax benefit, the QOF investment must have been made prior to January 1, 2020.
  
  
• Exclude All Gains from the Sale of a QOF Investment
  
  Taxpayers who defer paying tax on their capital gains by investing in a QOF and hold the QOF investment for at least 10 years can make an election under sec. 1400Z-2(c), IRC. This election allows the taxpayer to use the fair market value (FMV) of the QOF investment on the date it is sold or exchanged as the basis.
  
  

For more information about the federal qualified opportunity zone program, see the Internal Revenue Service's website: Invest in a Qualified Opportunity Fund.

Yes. As a result of 2017 Wis. Act 231, Wisconsin adopted sec. 13823 of federal Public Law 115-97, so the federal tax benefits apply for Wisconsin purposes, regardless of the opportunity zone's location.

"Wisconsin qualified opportunity fund" (WQOF) means a qualified opportunity fund, as defined in sec. 1400Z-2(d)(1), IRC, that holds at least 90 percent of its assets in Wisconsin qualified opportunity zone property, as measured on the last day of the first 6-month period of the fund's taxable year and the last day of the fund's taxable year. (See sec. 71.05(25m)(a)2., Wis. Stats.)

"Wisconsin qualified opportunity zone property" means qualified opportunity zone property, as defined in sec. 1400Z-2(d)(2), IRC, except that qualified opportunity zone business property, as defined in sec. 1400Z-2(d)(2)(D) and (3)(A)(i), IRC, must be located in a Wisconsin qualified opportunity zone.

"Wisconsin qualified opportunity zone" means a population census tract located in this state that is designated as a qualified opportunity zone under sec. 1400Z-1, IRC.

April 9, 2018. See the press release from the U.S. Department of The Treasury.

In addition to the federal tax benefits of investing in a QOF, taxpayers who defer paying tax on their capital gains by investing in a WQOF may qualify for a Wisconsin subtraction or basis modification under secs. 71.05(25m), 71.26(3)(vm), 71.34(1k)(p), or 71.45(2)(a)21., Wis. Stats.

If the taxpayer held the WQOF investment for at least 5 years and qualifies for the federal 10% exclusion, the Wisconsin subtraction or basis modification is 10% of the deferred capital gain.

If the taxpayer held the WQOF investment for at least 7 years and qualifies for the federal 15% exclusion, the Wisconsin subtraction or basis modification is 15% of the deferred capital gain.

Yes. For taxable years beginning on or after January 1, 2020, a WQOF is required to file Wisconsin Form WQOF with the department and provide a copy to each investor.

Prior to 2023 Wisconsin Act 146, the due date for filing Form WQOF and providing a copy to each investor was January 31 of the year following the close of the WQOF's taxable year. The only filing method for Form WQOF was through DocuSign.

As a result of 2023 Wisconsin Act 146, the due date for filing Form WQOF and providing a copy to each investor is the due date, including extensions, of the fund's corresponding Wisconsin income or franchise tax return. The DocuSign filing method has been discontinued, and funds must file Form WQOF by including it with their corresponding income or franchise tax return.

Any failure by the WQOF may result in the Wisconsin subtraction or basis modification under secs. 71.05(25m), 71.26(3)(vm), 71.34(1k)(p), or 71.45(2)(a)21., Wis. Stats., being denied for the investors.

Below is an example.

EXAMPLE:

Facts:

• For calendar years 2018 through 2030:
  
  
  • Individual Z:
    
    
    • Is a resident of Wisconsin
    • Is single
    • Has no items of income, loss, or deduction other than the items mentioned below
      
      
  • Corporation B:
    
    
    • Is a qualified opportunity fund (QOF), as defined in sec. 1400Z-2(d)(1), IRC
    • Is a Wisconsin qualified opportunity fund (WQOF), as defined in sec. 71.05(25m)(a)2., Wis. Stats.
    • Files federal Form 8996 and Wisconsin Form WQOF when required and by the respective due dates
      
      

Tax Year 2018

• Facts:
  
  
  • On June 1, 2018, Individual Z sells the stock of Corporation A for $100,000 which Z had purchased in 2016 for $10,000.
  • On July 1, 2018, Individual Z elects to defer 100% of the gain by investing $90,000 in Corporation B (a WQOF).
    
    
• Federal Treatment
  
  
  • Individual Z has a capital gain of $90,000 ($100,000 – $10,000) from selling the stock of Corporation A, but Individual Z’s federal adjusted gross income (FAGI) is zero because Individual Z invests the gain in Corporation B and elects to defer the gain under sec. 1400Z-2, IRC.
  • On December 31, 2018, Individual Z’s federal basis in Corporation B’s stock is zero.
    
    
• Wisconsin Treatment
  
  
  • Wisconsin follows the federal treatment of the capital gain deferral, so Individual Z's Wisconsin income is zero.
  • Wisconsin follows the federal treatment of Individual Z’s basis, so Individual Z’s Wisconsin basis in Corporation B’s stock is also zero.
  
  

Tax Year 2023

• Facts:
  
  
  • On July 1, 2023, Individual Z has held the investment in Corporation B's stock for at least five years.
    
    
• Federal Treatment
  
  
  • Individual Z’s FAGI is zero.
  • On July 1, 2023, Individual Z's federal basis in Corporation B's stock is increased by $9,000 ($90,000 X 10%).
    
    
• Wisconsin Treatment
  
  
  • Individual Z’s Wisconsin income is zero.
  • Wisconsin follows the federal treatment of basis, so Individual Z’s Wisconsin basis in Corporation B’s stock is also increased by $9,000.
  
  

Tax Year 2025

• Facts:
  
  
  • On July 1, 2025, Individual Z has held the investment in Corporation B's stock for at least 7 years.
    
    
• Federal Treatment
  
  
  • Individual Z’s FAGI is zero.
  • On July 1, 2025, Individual Z's federal basis in Corporation B's stock is increased by $4,500 ($90,000 X 5%). Total federal basis is $13,500 ($9,000 + $4,500).
    
    
• Wisconsin Treatment
  
  
  • Individual Z’s Wisconsin income is zero.
  • Wisconsin follows the federal treatment of basis, so Individual Z’s Wisconsin basis in Corporation B’s stock is also increased by $4,500. Total Wisconsin basis is $13,500.
  
  

Tax Year 2026

• Facts:
  
  
  • On December 31, 2026, the fair market value (FMV) of Individual Z's stock in Corporation B is $110,000.
    
    
• Federal Treatment
  
  
  • Individual Z’s FAGI is $76,500. Note: The computation of the taxable amount of the deferred gain is calculated before adjusting the basis in Corporation B's stock.
    
    

    Description	Amount
    Lesser of deferred gain OR FMV of Individual Z's stock in Corporation B (WQOF investment) on December 31, 2026	$90,000
    Individual Z's basis in Corporation B's stock	($13,500)
    Taxable amount of the deferred gain	$76,500

    
    
  • After the deferred gain is recognized, Individual Z's federal basis in Corporation B's stock is increased by $76,500. On January 1, 2027, total federal basis is $90,000 ($9,000 + $4,500 + $76,500).
    
    
• Wisconsin Treatment
  
  
  • Individual Z’s Wisconsin income is $40,050.
    
    

    Description	Amount
    FAGI	$76,500
    30% capital gain exclusion under sec. 71.05(6)(b)9., Wis. Stats. $76,500 X 30% = $22,950	($22,950)
    WQOF subtraction under sec. 71.05(25m), Wis. Stats. $9,000 + $4,500 = $13,500	($13,500)
    Wisconsin income	$40,050

    
    
  • Wisconsin follows the federal treatment of basis, so Individual Z’s Wisconsin basis in Corporation B’s stock is also increased by $76,500. Total Wisconsin basis is $90,000 ($9,000 + $4,500 + $76,500).
  
  

Tax Year 2030

• Facts:
  
  
  • On December 15, 2030, the FMV of Individual Z's stock in Corporation B is $1,000,000, and Individual Z sells the stock for $1,000,000.
    
    
• Federal Treatment
  
  
  • If Individual Z makes an election under sec. 1400Z-2(c), IRC, then Individual Z’s FAGI is zero ($1,000,000 sales - $1,000,000 basis).
  • If Individual Z does not make an election under sec. 1400Z-2(c), IRC, then Individual Z’s FAGI is $910,000.
    
    

    Description	Amount
    Proceeds from sale of Corporation B’s stock	$1,000,000
    Individual Z’s basis in Corporation B’s stock	($90,000)
    Gain from sale of Corporation B’s stock	$910,000

    
    
    
• Wisconsin Treatment
  
  
  • If Individual Z makes an election under sec. 1400Z-2(c), IRC, for Wisconsin purposes, then Individual Z’s Wisconsin income is zero ($1,000,000 sales - $1,000,000 basis).
  • If Individual Z does not make an election under sec. 1400Z-2(c), IRC, for Wisconsin purposes, then Individual Z’s Wisconsin income is $637,000.
    
    

    Description	Amount
    FAGI	$910,000
    30% capital gain exclusion under sec. 71.05(6)(b)9., Wis. Stats. $910,000 X 30% = $273,000	($273,000)
    Wisconsin income	$637,000