UPDATED – Some Opportunity Zone Investment Deadlines Extended by Federally Declared Disaster for COVID-19 by Arthur J. Lieberman
Posted on April 09, 2020
The COVID-19 pandemic has brought a variety of commercial transactions to a screeching halt. For businesses and investors involved in the Qualified Opportunity Zone (QOZ) program, this temporary pause can delay their ability to meet the program’s statutory time constraints, which may expose them to excise-tax penalties. However, relief from some deadlines currently is available depending on 1) where the taxpayer is in the required 180-day capital gain reinvestment period and 2) whether or not existing projects are located federally declared disaster areas due to COVID-19.
Under the QOZ program, investors can defer the taxation of recognized capital gains when they reinvest those gains into a Qualified Opportunity Fund (QOF) within 180 days. Additionally, investors who meet certain holding-period requirements may permanently exempt a portion of those deferred gains from tax and potentially avoid taxation of any capital gains generated by the QOF if certain holdings-period requirements are met by the investor and the QOF.
On April 9, 2020, the IRS issued Notice 2020-23, which, among other things, extends the 180-day reinvestment period for capital gains into a QOF until July 15, 2020, only when the 180-day period would otherwise end after April 1 and before July 15 of this year.
Excise Tax Penalties
One of the key statutory requirements for QOFs is that they must invest at least 90 percent of their assets in qualified property as of each semiannual testing date. If a QOF does not meet this asset test, its members will be subject to an excise-tax penalty on all or a portion of the deferred gain. Any cash raised during the six months immediately prior to the testing date is ignored for testing purposes.
Given the current crisis, it may be difficult for QOFs to deploy cash into qualifying projects in time to avoid the excise-tax penalty. There is a statutory reasonable-cause exception to the excise-tax penalty, but, as of April 8, the IRS has not issued guidance as to whether the COVID-19 pandemic qualifies for the statutory exception.
Notwithstanding this point, many QOFs utilizing two-tiered structures already qualify for relief from the excise-tax penalty. For QOFs that own Qualified Opportunity Zone Businesses (QOZBs), a working-capital safe harbor exempts working capital held by a QOZB from the 70 percent asset test applicable to QOZBs as long as they use that capital to acquire, construct or substantially improve tangible property in an QOZ within 31 months of receipt, pursuant to a written plan. If there are multiple infusions of cash, a separate 31-month period will apply to the second infusion.
According to the Opportunity Zone regulations, if a project otherwise meets the 31-month working-capital safe-harbor rules and it is located in a federally declared disaster area, the QOZB may receive up to an additional 24 months to use the capital to acquire, construct or substantially improve QOZ property if any delay in capital deployment is a result of the disaster. This is important relief for projects located in federally declared disaster areas experiencing difficulties with these projects due to COVID-19.
Additionally, if a QOF sells a qualifying asset at any time during the 10-year holding period required for forgiveness of capital gain, the QOF is permitted to reinvest those proceeds in a different qualifying asset and have that new investment qualify for the asset test and capital gain forgiveness if the proceeds are reinvested within 12 months of receipt. The regulations extend this deadline by up to an additional 12 months if the QOF’s plan to reinvest some or all of the proceeds in qualified opportunity zone property is delayed due to a federally declared disaster, provided that the QOF invests such proceeds in the manner originally intended before the disaster.
As of April 8, 2020, 57 states and U.S. territories have been declared federal disaster areas. QOZBs invested in opportunity zones in any of these jurisdictions will have up to an additional 24 months to deploy its capital. QOF’s looking to redeploy capital from sales of qualified property will have up to an additional 12 months to do so. The additional relief period depends on the length of time the disaster status remains in effect.
About the Author: Arthur J. Lieberman is a director with the Tax Services practice of Berkowitz Pollack Brant Advisors + CPAs, where he works with real estate companies and closely held businesses on deal structuring, tax planning, tax research, tax controversies and compliance issues. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at firstname.lastname@example.org.