Relief for Qualified Opportunity Funds & their Investors affected by the COVID-19 Pandemic
What is a Qualified Opportunity Fund and How Does It Work?
To defer a capital gain, a taxpayer has 180 days from the date of the sale or exchange of appreciated property to invest the realized capital gain dollars into a Qualified Opportunity Zone (QOZ) Fund. The fund then invests in QOZ Property.
QOZs are designed to spur economic development by providing tax incentives for investors who invest new capital in businesses operating in one or more QOZs.
The IRS recently issued Notice 2020-39, which offers relief to both qualified opportunity zone funds (“QOFs”) and persons seeking to invest in QOFs who are affected by the global COVID-19 pandemic.
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Investors in QOFs who want to defer capital gains and receive other QOF tax benefits are required to invest in a QOF within 180 days of the date of the sale that generated the gain or a later date applicable to partners, S Corporation shareholders or certain other special situations.
The Notice provides that if a taxpayer’s 180th day to invest in a QOF would have fallen on or after April 1, 2020 and before December 31, 2020, the taxpayer has until December 31, 2020 to invest that gain into a QOF. (Investors still need to make a valid deferral election and file Forms 8949 and 8997 with their tax return to obtain deferral.)
QOFs are subject to other time sensitive deadlines. QOFs who purchase real property are required to substantially improve the property within 30 months. The Notice provides that the period between April 1, 2020 and December 31, 2020 is suspended for purposes of the 30-month period during which property must be substantially improved.
QOFs are required to hold 90% or more of their assets in eligible QOZ property on certain testing dates each year. The Notice provides that, due to the pandemic, a QOF’s failure to hold less than the 90% of its assets in QOZ property on any testing dates from April 1, 2020 through Dec. 31, 2020 is due to reasonable cause. As a result, such failure will not cause loss of QOF status or imposition of penalties.
For QOZ business projects that meet the requirements of the 31-month working capital safe harbor, the Notice states that due to the COVID-19 pandemic, these projects may have up to an additional 24 months in which to spend their working capital. QOFs must still meet the other requirements for this exception such as having a written schedule of when they expect to invest their working capital.
The Notice offers welcome relief to both investors and funds seeking to comply with the QOF requirements. Nonetheless, QOFs still need to monitor and comply with these rules especially since prior to the pandemic, QOF investments were coming under greater scrutiny by both the IRS and Congress who wanted to ensure the intended benefits for local communities were being delivered.
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