Due to the COVID-19 pandemic, the government has given investors and developers an extension for deploying capital and starting projects in Opportunity Zones (OZ).
Before the deadline extension, investors were required to deploy 90 percent of their capital into OZ projects. To ensure these deployments were met, the government checked where OZ-related funds were going twice each year. With recent modifications to the rules by the Treasury Department and Internal Revenue Service, the new extension allows investors to hold onto those funds until June 30, 2021.
That isn’t all. Another extension is available in the form of an additional nine months tacked onto the current 30 months for making OZ property improvements, giving investors a total of 39 months. Previously, investors were required to make all improvements within the 30-month timeframe to take advantage of tax benefits. The 39 months don’t count against the April through December 2020 grace period, which was another update because of the pandemic.
Another modification is that investor capital gains are no longer required to be invested into an OZ fund within 180 days to be eligible for tax benefits. The government is allowing until the end of December to invest those gains.
These modifications are coinciding with a decline in property values due to the pandemic. Large institutional investors are looking to take advantage of the decline, as they are preparing to invest large amounts of money into distressed properties.
The driving forces behind the new OZ rule changes were headed up by Republican Sen. Tim Scott of South Carolina, who co-authored the original legislation for the OZ program, and eight other Republican senators. In May, the senators wrote to Treasury Secretary Steven Mnuchin and IRS Commissioner Charles Retti detailing the need to provide relief through the program.
The OZ program was part of the large 2017 tax overhaul. It provided investors and developers with tax benefits for investing in distressed properties. By investing in new projects or substantially rehabilitating existing properties, investors would be able to defer taxes on capital gains for up to 10 years and, in some cases, forgo taxes entirely. Investors had 8,700 designated OZs to choose from.
The OZ program initially struggled to make any headway due to its vague set of rules and high land costs in OZs. After several rounds of clarification through OZ regulation updates (the last in December of 2019), the government was hoping the program would take off. But its efforts seem to have paid off. The accounting firm Novogradac & Company analyzed 600 OZ funds and found that they raised $10 billion, which is a 50 percent increase from last year.