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What happens if a QOZ fund investor passes away/becomes deceased before holding their QOZ investment for at least 10 years? What if the investor passes away/becomes deceased before early 2027 when deferred taxes come due?

If a QOZ fund investor passes away while still holding their QOZ fund interest, it does not trigger a taxable event. Their beneficiary steps into the shoes of the decedent investor and inherits the investment at the decedent investor’s basis. This means that the beneficiary does not get to step up their basis on the investment at the time of inheriting it. However, the 10-year clock on the minimum hold period to receive tax-free appreciation on the QOZ investment keeps ticking rather than restarting when the investment is transferred to the investor’s beneficiary. Once the decedent investor and their beneficiary have held the investment for a combined total of 10 years, the beneficiary gets a 100% step-up in basis upon liquidating the QOZ investment, resulting

in zero tax liability on the capital gains that the QOZ investment generated over the 10 or more years. Example:

1. Investment is made in 2021.
2. Investor passes away in 2028 after holding the QOZ investment for 7 years and paying their deferred tax liability in 2027.
3. Investor’s beneficiary inherits the QOZ investment in 2028 at it’s fair market value with no step-up in basis.
4. Come 2031 or after, the investment will have been held by investor and their beneficiary for a combined 10 or more years. Any time after it’s been held for 10 years combined, the beneficiary can liquidate the investment and once they do that, their basis in the investment will step-up to the full fair market value at time of liquidation, resulting in no capital gains tax liability to the beneficiary.

In the event the beneficiary sold the QOZ investment prior to the investment being held for a combined 10 years by the beneficiary and the decedent investor, then the beneficiary would owe taxes on all appreciation that was generated over the period the QOZ investment was held.

In the event the original investor passed away prior to December 31, 2026 or prior to paying the taxes on the deferred gain (due in early 2027), then their beneficiary of the QOZ investment would assume the deferred tax liability and would be liable for paying it by their tax payment deadline in 2027.