The COVID-19 pandemic led the IRS to loosen a range of tax laws and regulations, including many deadlines. In June, the IRS issued guidance that provided relief from some qualified opportunity zone (QOZ) requirements — good news for investors with capital gains. With the end of the year approaching, many of those extended deadlines are coming due.
Related Read: Qualified Opportunity Zone Update: IRS Issues Additional Proposed Regulations
Relevant QOZ requirements
Investors generally can defer short- or long-term capital gains on a sale or disposition of their investments by reinvesting the gains in a qualified opportunity fund (QOF) within 180 days. The tax will be deferred until the fund investment is sold or exchanged, or December 31, 2026, whichever is earlier.
A QOF must hold at least 90% of its investments in QOZ property. Compliance is determined based on the average of the percentage of QOZ property held by the QOF on: 1) the last day of the first six-month period of the taxable year of the fund; and 2) the last day of the QOF’s taxable year. No penalty is imposed if the test is failed due to reasonable cause.
To be a QOZ business, less than five percent of the average of the aggregate unadjusted bases of a business’s property can be attributable to nonqualified financial property. A safe harbor may exclude working capital from nonqualified financial property, though. It applies if, among other things, the business has a working capital plan for its project that is scheduled for completion within 31 months.
Tangible property qualifies as QOZ business property if it is used in a QOF trade or business and satisfies certain requirements. Under the original use requirement, the original use of post-2017 acquired tangible property in the QOZ must begin with the QOF. Alternatively, the QOF must substantially improve the property within 30 months of acquisition.
When a QOF sells or disposes of its interest in a QOZ business, or receives a return of capital on such interest, it has 12 months to reinvest the proceeds in another QOZ business. If it does, the proceeds generally count as QOZ property for the 90% investment standard.
Related Read: Tax Tips: Refund Opportunity for Excess Business Losses
IRS Notice 2020-39 made temporary adjustments to these requirements, including:
- 180-Day Investment Period
If a taxpayer’s 180th day to invest in a QOF would have fallen on or after April 1, 2020 and before December 31, 2020, it now has until the end of 2020 to invest the gain in a QOF.
- 90% Investment Test
A QOF’s failure to meet this test on any semi-annual testing dates from April 1, 2020 through December 31, 2020, is deemed to be due to reasonable cause.
- 30-Month Substantial Improvement Period
The notice suspends the period between April 1, 2020 and December 31, 2020, for purposes of the 30-month period.
- Working Capital Safe Harbor
QOZ business projects that meet the requirements of the safe harbor have up to an additional 24 months to spend their working capital.
- 12-Month Reinvestment Period
If a QOF’s 12-month period includes January 20, 2020 (the date the federal government has deemed as the start of the COVID-19 disaster in the United States), it has up to an additional 12 months to reinvest the proceeds as it had planned before that date.
With the pandemic spiking in new cases again, it is possible the IRS will provide additional tax relief from the upcoming deadlines. We will keep you apprised of the most important developments, but be aware of the existing upcoming deadlines in case further relief is not forthcoming.
If you have questions or need additional guidance, please contact Jeffrey Newman at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Real Estate Group.