Earlier this month, the Internal Revenue Service (IRS) released Notice 2020-39 which postpones certain deadlines and provides other relief for Qualified Opportunity Funds (QOFs) and their investors in response to the 2019 novel coronavirus disease (COVID-19).
The impact of COVID-19 on real estate investment and the general conduct of business has been widespread. In response, the IRS has extended certain deadlines relating to making investments in QOFs and provided for other relief.
180-Day Investment Requirement for QOF Investors
To receive opportunity zone tax benefits, an investor must generally reinvest capital gains into a QOF within 180 days of the relevant sale or exchange.
Under Notice 2020-39, if a taxpayer’s 180-day period to invest gain into a QOF expires on or after April 1, 2020 and before December 31, 2020, the deadline is postponed until December 31, 2020. This relief is automatic and no action is required to receive this relief.
90% Qualified Asset Threshold
A QOF must hold 90% of its assets in qualified opportunity zone property or be subject to a statutory penalty unless the failure to meet the threshold is due to reasonable cause.
Under Notice 2020-39, a QOF’s failure to satisfy the 90% threshold is deemed due to reasonable cause and will be disregarded for any QOF whose last day of the first 6-month period of the taxable year or last day of the taxable year falls on any date from April 1, 2020 to December 31, 2020. This relief is automatic; no action is required to receive this relief.
30-Month Substantial improvement Period
Property may qualify as qualified opportunity zone property if it is considered to be substantially improved during any 30-month period.
Under Notice 2020-39, for purposes of the substantial improvement requirement, the IRS will disregard the period from April 1, 2020 through December 31, 2020 in determining any 30-month substantial improvement period.
Working Capital Safe Harbor
Qualified opportunity zones business may take advantage of a working capital safe harbor that would allow such business to hold more working capital than it would be allowed to hold absent the safe harbor.
If the qualified opportunity zone business is located in a federally-declared disaster area, it may receive up to an additional 24 months to expend the working capital. Notice 2020-39 clarifies that this protection is applicable to all qualified opportunity zone businesses holding working capital assets intended to be covered by the working capital safe harbor before December 31, 2020 if they otherwise meet all requirements to qualify for the working capital safe harbor.
12-Month Reinvestment Period
If a QOF sells or disposes of some or all of its qualified opportunity zone property, any proceeds reinvested in qualified opportunity zone property by the last day of the 12-month period beginning on the date of the sale or disposition are treated as QOZ property for purposes of the 90% investment standard.
If the QOF’s plan to reinvest some or all of these proceeds in qualified opportunity zone property is delayed due to a federally-declared disaster, the QOF may receive up to an additional 12 months to reinvest the proceeds if the QOF invests the proceeds in the manner originally intended before the disaster. Notice 2020-39 clarifies that this protection is applicable to any QOF if the QOF’s 12-month reinvestment period includes January 20, 2020, the date of the major disaster declarations.
For more information on Qualified Opportunity Zones or the Final Regulations, contact:
- Doug Jones, Partner (firstname.lastname@example.org, 512-495-6013)