Cecily Zamora
TurboTax users have been asking whether the software will support Opportunity Zone investments for several years, with no updates from TurboTax. Opportunity Zones were added to the tax code by the Tax Cuts and Jobs Act on December 22, 2017. A Qualified Opportunity Zone (QOZ) is an economically distressed community where new investments may be eligible for preferential tax treatment. TurboTax users have been disappointed that the software does not support QOZ filing, with some saying they will have to hire an accountant for the first time in 20 years.
| Characteristics | Values |
|---|---|
| TurboTax support for Opportunity Zone investments | Not supported in 2019, 2020, and 2021 |
| Required forms | Form 8997, Form 8949 |
| Workarounds | Manual override, but this requires printing and mailing returns, voids TurboTax accuracy guarantee, and prevents e-filing |
| Alternative software | H&R Block, Tax Act |
| Opportunity Zones | Economically distressed communities where new investments may be eligible for preferential tax treatment |
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What You'll Learn
TurboTax does not support Form 8997
One workaround suggested by some users is to first file taxes electronically and then file an amended return that includes Form 8997. However, this is not an ideal solution as it requires additional steps and can be confusing for those who are not familiar with the process.
It is worth noting that other tax software, such as TaxAct and H&R Block, do support Form 8997. Some users have expressed their disappointment in TurboTax's lack of support for this form and have even switched to competing software as a result.
While TurboTax has not provided an official explanation for why they do not support Form 8997, some users have speculated that it may be because opportunity zone investments are primarily used by taxpayers with more substantial resources, who are less likely to use TurboTax. However, with the increasing popularity of opportunity zone investments, many users are hoping that TurboTax will reconsider and add support for Form 8997 in the future.
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TurboTax does not support deferring capital gains from opportunity zone investments
To defer tax on eligible gains, you must invest in a Qualified Opportunity Fund (QOF) in exchange for equity interest within 180 days of realizing the gain. The amount of time you hold the QOF investment determines the tax benefit you receive. If you hold your investment in the QOF for at least 5 years, your basis (the amount of your investment) will increase by 10% of the deferred gain. If you hold your investment in the QOF for at least 7 years, your basis will increase by an additional 5% of the deferred gain.
If you have made investments into qualified opportunity zones from your capital gains and want to defer the capital gains as a result, you will need to override TurboTax on Form 8949 by putting an X in column F and the amount to defer (as a negative) in column G, in accordance with IRS form guidance. The correct (lower) capital gain will carry through on Form 1040. However, when running the TurboTax reviews, the override entries will show up as errors, and the return must be mailed (not filed electronically) due to these errors.
It is unclear why TurboTax continues to ignore OZ investment filing, but some users have speculated that it may be because OZ investing is primarily used by taxpayers with more substantial resources and, therefore, less likely to use a product like TurboTax.
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Opportunity zone investments are not supported on the TurboTax mobile app
TurboTax does not support opportunity zone investments on its mobile app or otherwise. This is because TurboTax does not support Form 8997, which is the form you need to report an opportunity zone investment.
Opportunity Zones (OZs) are economically distressed communities where new investments, under certain conditions, may be eligible for preferential tax treatment. Localities qualify as Qualified Opportunity Zones (QOZs) if they were nominated for that designation by a state, the District of Columbia, or a U.S. territory, and that nomination was certified by the Secretary of the U.S. Treasury via his delegation of authority to the Internal Revenue Service (IRS).
QOZ investors can defer tax on any prior eligible gain to the extent that a corresponding amount is timely invested in a Qualified Opportunity Fund (QOF). The deferral lasts until the earlier of the date on which the investment in the QOF is sold or exchanged, or December 31, 2026. If the QOF investment is held for at least 5 years, there is a 10% exclusion of the deferred gain. If held for at least 7 years, the 10% exclusion becomes 15%.
If you want to defer capital gain by investing in a QOF, you cannot use TurboTax to file your tax return. You can manually override TurboTax by putting an X in column F and the amount to defer (as a negative) in column G of Form 8949, in accordance with IRS form guidance. However, this will result in errors when running the TurboTax reviews, and the return must be mailed rather than filed electronically. This also invalidates the TurboTax accuracy guarantee.
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Alternative tax software for opportunity zone investments
The Opportunity Zone (OZ) program, introduced in 2017, allows investors to defer taxes on capital gains until December 31, 2026, if they reinvest their net profits into a qualified opportunity zone fund within six months. The program also eliminates part or all of the deferred gain when investors hold their money in the fund for five years or longer.
While TurboTax does not support OZ investment filing, there are several alternative tax software programs that do:
- TaxAct: This software has supported OZ investment filing since its inception. It appears to cleanly support input from TurboTax. However, there are mixed reviews on the quality of this software.
- Intuit's ProConnect: This is one of the lesser-priced professional software packages and it appears to support OZ investment filing. It also supports input from TurboTax.
- H&R Block: This software supports OZ investment filing, but it requires manually updating the 8949 form and then printing and mailing it. Additionally, H&R Block does not support electronic filing if Form 8997 is needed.
- DrakeTax and UltimateTax: These software options sell a "per-pay-return" 1040 product that is more reasonably priced for individuals. However, it is unclear if they specifically support OZ investment filing.
It is important to note that OZ investment filing can be complex, and it is always recommended to consult with a tax professional or expert to ensure accurate and compliant tax reporting.
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Manually filing opportunity zone investments
The Opportunity Zone program allows for the sale of appreciated assets, such as real estate or stocks, and the reinvestment of gains into a Qualified Opportunity Fund (QOF). This program provides tax incentives for private, long-term investment in economically distressed communities.
To manually file opportunity zone investments, you will need to follow these steps:
- Identify the Qualified Opportunity Zone: Determine if your investment is located in a Qualified Opportunity Zone (QOZ). A list of QOZs can be found in IRS Notices and on the IRS website.
- Complete the Necessary Forms: To report an opportunity zone investment, you will need to fill out Form 8997, Initial and Annual Statement of Qualified Opportunity Fund (QOF) Investments. This form must be attached to your federal income tax return (Form 1040). Additionally, if you sold or exchanged your investment in a QOF during the tax year, you must also complete Form 8949, Sales and Other Dispositions of Capital Assets, to report the gain or loss.
- Calculate the Deferred Gain: Determine the amount of gain you are deferring by investing in the QOF. The deferred gain is reported separately on Form 8997 and is not included in your federal income tax return (Form 1040).
- File the Forms: You will need to file Form 8997 and Form 8949 (if applicable) with your federal income tax return. These forms cannot be filed electronically, so you will need to print and mail them to the IRS.
- Keep Accurate Records: It is important to maintain accurate records of your opportunity zone investments. This includes keeping track of the basis and adjusted basis of your property, as well as any other relevant documentation.
It is important to note that manually filing opportunity zone investments can be complex, and it is always recommended to consult with a tax professional or expert to ensure accuracy and compliance with tax regulations.
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Frequently asked questions
No, TurboTax does not support Form 8997, which is the form you need to report an opportunity zone investment.
TurboTax does not support Qualified Opportunity Zone Funds deferral of eligible gains. You can manually override this by amending Form 8949 and then printing and mailing it. However, this will void the TurboTax accuracy guarantee and you will not be able to e-file your tax returns.
It is hard to understand why TurboTax does not support opportunity zone investment filing. One possible reason is that opportunity zones sunset after the 2025 tax year, so it may not be worth it for the company to implement the feature.
