Articles

IRS Provides COVID-19 Relief for Opportunity Zone Investors by Arkadiy Eric Green, CPA


Posted on June 12, 2020 by Eric Green

On June 4, 2020, in response to the COVID-19 pandemic, the IRS issued another round of guidance relaxing certain deadlines and requirements that Qualified Opportunity Zone (QOZ) investors and funds must meet in order to obtain preferential tax benefits.

As a reminder, the QOZ program, introduced by Congress in December 2017 provides investors with potential opportunities to defer and reduce the taxation of eligible capital gains when they reinvest those gains in one or more Qualified Opportunity Funds (QOFs) within a 180-day period. In addition, investors may potentially avoid taxation of future gains generated by the QOFs when they and the QOFs meet certain holding-period and other requirements.

Extension of 180-Day Investment Period

IRS Notice 2020-39 postpones until Dec. 31, 2020, the 180-day period taxpayers would normally have to reinvest eligible capital gains into qualified opportunity funds (QOFs) provided that the original 180-day investment window would have ended between April 1, and Dec. 31, 2020. This extension of time to qualify for tax deferral is welcome news to both individual QOF investors and taxpayers structured as pass-through entities (i.e. partnership and LLCs). Previous guidance had extended the 180-day investment period to July 15, 2020.

Temporary Suspension of the Asset Test

To qualify for tax deferral, QOFs must conduct two semi-annual tests to ensure that they hold at least 90 percent of their assets in qualified opportunity zone property (QOZP), including direct investment in qualified opportunity zone business property (QOZBP) or investments in other companies treated as qualified opportunity zone businesses (QOZBs).

Under notice 2020-39, however, QOFs that do not meet this threshold on testing dates that fall between April 1 and Dec. 31, 2020, will automatically receive relief and avoid penalties. Essentially, the IRS is disregarding failed 90-percent test results that occur during most of 2020, regardless of whether a shortfall was due to the COVID-19 crisis.

Suspension of the 30-Month Timeline for Substantial Property Improvements

In general, to be treated as QOZBP, 1) the original use of the property must begin with the QOF that acquires the property, or 2) the QOF (or lower-tier QOZB) must “substantially improve” the property within 30 months of acquisition. As a result of the disruptions to normal operations created by the coronavirus, Notice 2020-39 allows opportunity fund entities to disregard the period beginning on April 1, 2020, and ending on December 31, 2020, for purposes of determining the 30-month substantial improvement period. As a result, QOFs and QOZBs now have more time to satisfy the substantial improvement requirement.

Additional Relief

Notice 2020-39 also reminds taxpayers that QOZB projects that otherwise qualify for the 31-month working-capital safe harbor under the final QOZ regulations now have up to an additional 24 months to expend their working capital due to COVID-19 crisis. In addition, QOFs that receive proceeds from sales or dispositions of QOZ property or return of capital distributions with original 12-month reinvestment period including January 20, 2020, now have up to an additional 12 months to reinvest such proceeds in other eligible QOZ property.

About the Author: Arkadiy (Eric) Green, CPA, is a director of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where he works with real estate companies, commercial and residential developers, property management companies, real estate investors and high-net-worth individuals to structure investments and complex transactions for maximum tax efficiency. He can be reached at the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or via email at info@bpbcpa.com.