This Just In: IRS Extends Relief for Opportunity Zone Investors
February 15, 2021
Nearly one year after the start of the COVID-19 pandemic, the United States economy is still reeling from the effects of extended lockdown. Many of the same economic struggles continue to plague businesses and individuals, triggering Congress and the IRS to provide new and expanded assistance to taxpayers. On January 19, 2021, the IRS announced an extension of the relief previously offered to investors participating in the Qualified Opportunity Zones (QOZ) program. The expanded assistance is welcome news to Qualified Opportunity Funds (QOFs) and QOF investors who relied heavily on the 2020 tax year’s relief, which provided critical extensions for the program’s strict investment requirements.
Not familiar with the QOZ program? Let’s change that
The QOZ program was established by the Tax Cuts and Jobs Act (TCJA) of 2017, creating a lucrative federal program incentivizing investment in economically depressed areas. Investors soon realized the potential capital gains savings they could earn by participating in the program and its popularity exploded across the participating states, despite the strict rules and requirements for qualifying investments. To benefit from the program, investors must commit to long holding periods, pass regular testing requirements and abide by strict timelines for property improvements and reinvesting gains. As the effects of the pandemic set in, investors became concerned about their ability to meet those strict timelines, prompting the IRS to implement temporary measures to ease the requirements. With COVID-19 cases still on the rise across the country, the IRS has extended and expanded these temporary measures to further aid QOFs and investors.
New relief provides critical extensions for investors
The IRS’s latest announcement detailed five key relief areas, focusing on QOZ investors, QOFs and Qualified Opportunity Zone Businesses (QOZBs):
- QOF Investment Timeline Extension: Taxpayers’ 180-day period to invest in a QOF and defer capital gains tax is extended to March 31, 2021, providing three additional months over the previous relief. This is applicable if the last day of the taxpayer’s 180-day investment period falls on or after April 1, 2020, and before March 31, 2021.
- Substantial Improvement Timeline Extension: The 30-month substantial improvement requirement is suspended from April 1, 2020, through March 31, 2021, providing QOFs and QOZBs with an additional 12 months to complete substantial property improvements and still qualify.
- 90% Asset Test Flexibility: QOFs whose last day of the first six-month period of a taxable year or last day of a taxable year falls within the period beginning April 1, 2020, and ending June 30, 2021, may now benefit from reasonable cause relief for the 90% investment standard.The IRS will consider any failure to satisfy the 90% investment standard during the taxable year as due to reasonable cause; failure by a reasonable cause does not prevent QOF qualification or disqualify an investment in a QOF.
- QOZB Working Capital Extension: QOZBs covered by the working capital safe harbor before June 30, 2021, will receive up to an additional 24 months to expend the working capital assets, including previous relief provided under Notice 2020-39.
- Reinvestment of Proceeds Extension: QOFs whose 12-month reinvestment period included June 30, 2020, have an additional 12 months to reinvest in QOZ property, providing up to a total of 24 additional months combined with previous relief.
The bottom line
This new relief from the IRS will have a widespread impact on QOFs and individual investors. While these new measures bring welcome flexibility, they also bring additional rules and regulations that might impact your investment plans. If you are currently participating in the QOZ program, it is important to understand what benefits are available to you and how you can maximize your investment. Have you invested in the QOZ program? Do you want to defer or reduce tax on your recognized capital gains? Aprio can help you achieve both outcomes. If you have questions or would like to receive more information, please reach out to me or Aprio Tax Manager Ross Boardman.