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Sean Bryan Authors Column on Extensions on Qualified Opportunity Zone Time Periods

Sean Bryan’s article—entitled “Treasury Extends Qualified Opportunity Zone Time Periods”—addresses extensions of time periods for investment in or by a qualified opportunity fund (QOF) as a result of the declaration of disaster due to COVID-19.

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:

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