In June, we discussed guidance issued by the Internal Revenue Service ("IRS"), which extended several key Opportunity Zone deadlines because of concerns related to COVID-19. Because of the ongoing pandemic and its effect on the Opportunity Zone Initiative, the IRS has again extended those deadlines, as detailed below:
Extension of Time to Invest Capital Gains into Opportunity Zone Funds. Previously, any taxpayer whose 180-day deadline to invest eligible capital gain into a Qualified Opportunity Fund ("QOF") fell between April 1, 2020 and December 31, 2020 had until December 31, 2020 to invest. Under this new guidance, any 180-day deadline ending between April 1, 2020 and March 31, 2021 is now extended to March 31, 2021. As a result, some investors will have up to 14 additional months to invest their capital gains into a QOF from their original 180-day deadline that would have run without COVID relief.
Qualified Opportunity Zone Fund 90% Test. QOFs are tested on a semi-annual basis and can be penalized if 90% of the assets of the QOF are not invested in eligible Opportunity Zone property. The new extension provides that the IRS will not impose the penalty on a QOF for failing to satisfy the 90% standard in that tax year if the QOF's: (i) last day of the first six-month testing period, or (ii) the last day of the taxable year falls between April 1, 2020 and June 30, 2021 (extended from December 31, 2020).
Substantially Improving Property. QOFs and Qualified Opportunity Zone Businesses ("QOZBs") generally have a 30-month timeline to substantially improve assets to qualify as good Opportunity Zone property for assets that do not otherwise qualify as "original use" assets. The IRS has stated that the 30-month timeline is tolled between April 1, 2020 and March 31, 2021, which allows QOFs and QOZBs to disregard the period between April 2020 and March 2021 when calculating the 30-month timeline.
Working Capital Safe Harbor Timeline. The Opportunity Zone regulations provided a 31-month working capital safe harbor to allow a QOZB to turn investments and cash into qualifying Opportunity Zone property. The prior extension provided an additional 24 months for assets invested into the QOZB during the COVID relief period, so long as such funds were invested by pursuant to a plan by December 31, 2020. That 24-month extension was further extended for amounts covered by the working capital safe harbor plan and invested before June 30, 2021.
QOF Reinvesting Proceeds. QOFs have 12 months to reinvest proceeds the QOF received from a return on investment or a disposition of Opportunity Zone property. The prior relief granted an additional 12-month reinvestment period if the initial period included January 20, 2020. The new guidance also provides an additional 12-month extension for any reinvestment period that includes June 30, 2020, where the total period cannot exceed 24 months.
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