Form 8997: line-by-line guide and deferral tracker
Form 8997 is the investor's annual statement of Qualified Opportunity Fund (QOF) investments and deferred gains. You file it with your return every year you hold a QOF investment that carries a deferral election (Form 8997 and instructions).
Deferral and inclusion tracker
| Date invested in QOF | Deferred gain | Rural QROF (OZ 2.0) | Rules | Inclusion date | Basis step-up | Gain included (before FMV limit) | 10-year FMV election from | |
|---|---|---|---|---|---|---|---|---|
| OZ 1.0 | Dec 31, 2026 | 10% | $225,000 | Jun 15, 2031 | ||||
| OZ 2.0 | Mar 1, 2032 | 30% | $350,000 | Mar 1, 2037 |
Where each lot goes on Form 8997: Part II in the year you invest and elect deferral; Part I at the start of each later year you still hold it; Part III in the year of an inclusion event (a sale, or the inclusion date above); Part IV at each year end while deferred gain remains. The amount included is the smaller of the remaining deferred gain or the investment's fair market value minus basis (§1400Z-2(b)(2)(A)); this table assumes FMV is at least the deferred gain. Illustration only, not tax advice.
Line by line
Part I: holdings at the start of the year
List each QOF investment you held on the first day of the tax year that was due to a deferral: the QOF's name and EIN, the date acquired, and the remaining deferred gain, split short-term and long-term (Form 8997, Part I).
Part II: gains deferred this year
Report each new QOF investment that deferred a gain this year, and also report the deferral on Form 8949. Only eligible gain qualifies: capital gain or qualified §1231 gain, not from a sale to a related person, invested within the 180-day period (Treas. Reg. §1.1400Z2(a)-1(b)(11)). Use the 180-day deadline calculator to check timing.
Part III: inclusion events
Report any inclusion event (for example, selling or gifting the interest, or a distribution in excess of basis) and the deferred gain it triggers, plus certain noninclusion transfers (Form 8997, Part III; Treas. Reg. §1.1400Z2(b)-1(c)).
Part IV: holdings at year end
List every QOF investment still held at year end with deferred gain remaining. Part IV carries forward to next year's Part I (Form 8997, Part IV).
When deferred gain comes back
- OZ 1.0 investments (made on or before Dec 31, 2026): deferred gain is included on the earlier of a sale or December 31, 2026. Basis rises 10% after 5 years and another 5% after 7 years, counted to that date, so the 10% needed investment by Dec 31, 2021 and the 15% by Dec 31, 2019 (IRC §1400Z-2(b)).
- OZ 2.0 investments (made after Dec 31, 2026): deferred gain is included on the earlier of a sale or 5 years after the investment, with a 10% basis step-up at 5 years, or 30% for a qualified rural opportunity fund (IRS Notice 2026-55; P.L. 119-21, §70421).
- The amount included is the smaller of the deferred gain or the investment's fair market value minus basis (§1400Z-2(b)(2)(A)).
- After 10 years, you can elect to step up basis to fair market value on sale, so QOF appreciation is not taxed (§1400Z-2(c)). Under OZ 2.0, that applies to sales up to 30 years after the investment (Notice 2026-55).
FAQ
Who files Form 8997?
Every taxpayer who holds a Qualified Opportunity Fund investment with a deferral election files Form 8997 with their return each year: when they invest (Part II), every year they hold it (Parts I and IV), and in a year with an inclusion event (Part III).
When is OZ 1.0 deferred gain taxed?
On the earlier of selling the QOF investment or December 31, 2026, under IRC §1400Z-2(b)(1). It is reported for the 2026 tax year.
When is OZ 2.0 deferred gain taxed?
For investments made after December 31, 2026, on the earlier of a sale or 5 years after the investment, after a 10% basis step-up (30% for a qualified rural opportunity fund), per IRS Notice 2026-55.
Do I also report the deferral on Form 8949?
Yes. In the year you invest, report the deferral of the eligible gain on Form 8949 as well as in Part II of Form 8997 (Form 8997 instructions).
Not tax advice. This page is general information drawn from IRS forms, instructions, the Internal Revenue Code and Treasury regulations as of October 12, 2026. Rules can change and your facts matter; confirm with a qualified tax professional before you file or invest. Related: Form 8996 helper · Form 8997 helper · 180-day deadline calculator · OZ 2.0 tax calculator