IRS Guidance Provides More Coronavirus Relief to Qualified Opportunity Funds and Their Investors – Including Additional Time To Invest
June 9, 2020
On June 4, 2020, the Internal Revenue Service (IRS) further extended the period for some investors to reinvest capital gains into qualifying opportunity funds (QOFs) because of the continuing impact of the coronavirus pandemic.
Under the opportunity zone incentive described in Section 1400Z-2 and associated regulations (Incentive), a taxpayer with capital gain resulting from the sale of property (including, for example, real estate, stock, fine art, etc.) to an unrelated person could, among other potential benefits, defer paying taxes on any portion of that gain that is reinvested into a QOF within 180 days of the sale. Pursuant to the new relief described in Notice 2020-39, if a taxpayer’s 180th day would have fallen on or after April 1, 2020, and before December 31, 2020, the taxpayer now has until December 31, 2020, to reinvest the gain into a QOF to qualify for the Incentive.
The IRS previously extended the 180 day period for some gain reinvestments to July 15, 2020, under Notice 2020-23. But the additional extension recognizes the continuing economic impact and uncertainty may continue through the end of the year.
Notably, the guidance also provides QOFs with other relief including:
- Penalty Relief. A QOF will not incur the penalties for failing to hold at least 90% of its assets in “qualified opportunity zone property”, on any semi-annual testing date from April 1, 2020, through December 31, 2020, provided that the failure is from a reasonable cause, and does not prevent the entity from qualifying as a QOF or an investment from being a “qualified investment,” each as described in the Incentive.
- Substantial Improvement Period Tolled. The 30-month period in which a QOF or qualified opportunity zone business (QOZB) must “substantially improve” certain property is tolled from April 1, 2020, through December 31, 2020. In effect, that 9-month period will be disregarded in determining whether a QOF or QOZB satisfies the substantial improvement test described in the Incentive.
- Working Capital Safe Harbor Extension. As a result of the March 13, 2020, emergency declaration, any QOZB holding working capital assets intending to be covered by the working capital safe harbor before December 31, 2020, receive up to an additional 24-months to expend that working capital before the amounts count towards the nonqualified financial property limitation described in the Incentive.
- 12 Month Reinvestment Period. A QOF is granted up to an additional 12-months to reinvest some or all of the proceeds received from the sale of qualified opportunity zone property, it the initial 12-month period included January 20, 2020, and the proceeds are reinvested as originally intended before January 20, 2020.
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