Among the last acts of the Trump administration, the IRS on January 19, 2021, issued a Notice extending a number of time periods applicable to qualified opportunity funds (QOF). These extensions are in addition to extensions made in mid-2020 as a result of the federal disaster declaration due to COVID-19.
IRS Notice 2021-10: https://www.irs.gov/pub/irs-drop/n-21-10.pdf
- 180-Day Reinvestment of Gain. 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 was previously postponed until December 31, 2020. The new notice extends until March 31, 2021, any reinvestment period that would have otherwise ended between April 1, 2020 and March 31, 2021. This extension is automatic but does not eliminate the need to make a valid deferral election and complete the applicable IRS forms.
- 90% Investment Standard. A QOF must meet a 90% investment standard each six months. Previously, 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 was deemed to be due to reasonable cause, thus meeting the regulatory requirement to avoid a penalty for such failure. The new notice extends this period to between April 1, 2020 and on or before June 30, 2021. 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.
- 30 Months to Substantially Improve Property. 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 April 1 and December 31, 2020, the period was extended to begin January 1, 2021. The new notice now permits a QOF and QOZB to disregard the period beginning April 1, 2020, and ending March 31, 2021, so that the 30-month period may begin on April 1, 2021.
- Working Capital Safe Harbor. 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 regulations provide for up to a 24 month extension to the safe harbor period in the event of a disaster declaration, and this extension was formally granted for QOZBs holding working capital assets pursuant to the safe harbor before December 31, 2020. As now extended further, QOZBs holding working capital assets to be covered by the safe harbor before June 30, 2021 shall receive an extension of not more than 24 months, for a maximum safe harbor period of 55 months, and not more than 86 months for start-up businesses.
- Reinvestment of Proceeds by QOF. 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 during such period, the cash is treated as QOZP. Under the new notice, for any 12-month reinvestment period that includes June 30, 2021 , a QOF will receive an additional 12 months to reinvest such proceeds, for a total of 24 months to reinvest sale proceeds by a QOF. None of this relief negates the other applicable rules relating to QOFs, QOZBs and QOZP.