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The final regulations issued by the Treasury Department in January 2020 provide for certain extensions of time periods that might result from a federal declaration of disaster affecting a qualified opportunity zone (QOZ), and President Trump’s nation-wide declaration of disaster on March 13, 2020 was thought to trigger these relief measures, but until now no guidance was forthcoming. On June 4, the IRS issued a notice extending a number of the time periods for investment in or by a qualified opportunity fund (QOF) as a result of the declaration of disaster due to COVID-19.
1. An eligible investor has a 180-day period in which to invest gain from a sale of property into a QOF in order to defer the tax on that gain. For 180-day periods ending on or after April 1 and before December 31, 2020, the last day is postponed until December 31, 2020. This extension is automatic but does not eliminate the need to make a valid deferral election and complete the applicable IRS forms.
2. A QOF must meet a 90% investment standard each six months. For a QOF whose first 6-month period of a taxable year, or whose taxable year, would end on or after April 1, 2020 and on or before December 31, 2020, a failure to meet the 90% investment standard is deemed to be due to reasonable cause, thus meeting the regulatory requirement to avoid a penalty for such failure. Additionally, this failure is disregarded for purposes of determining if a QOF or its investments satisfy the QOZ rules for any taxable year. These provisions are both automatic but require that IRS Form 8996 be completed with a “0” in Part IV, Line 8.
3. A QOF or qualified opportunity zone business (QOZB) ordinarily has 30 months to “substantially improve” a property in order for it to be qualified opportunity zone business property (QOZBP), with such period beginning on the date of acquisition. For any 30-month period otherwise beginning between on April 1 and December 31, 2020, the period instead begins January 1, 2021.
4. A QOZB may hold working capital without violating certain tests by reason of a safe harbor that lasts for 31 months (with possible extensions). The final regulations provide for up to a 24 month extension to the safe harbor period in the event of a disaster declaration, and this extension has been formally granted for QOZBs holding working capital assets pursuant to the safe harbor before December 31, 2020.
5. Normally, the gain from a sale by a QOF of its qualified opportunity zone property (QOZP) is taxable, but the regulations grant a 12-month period to reinvest such proceeds and avoid triggering taxable gain. If reinvested in such period, the cash is treated as QOZP. For any 12-month reinvestment period that include January 20, 2020 , a QOF will receive an additional 12 months to reinvest such proceeds. None of this relief negates the other applicable rules relating to QOFs, QOZBs and QOZP.
Link to Notice 2020-39: https://www.irs.gov/pub/irs-drop/n-20-39.pdf.