In November 2020, we offered an overview of the IRS’ Notice 2020-39. That information explained coronavirus pandemic-driven “resets” when it came to Qualified Opportunity Zone (QOZ) deadlines. For example, the 180-day reinvestment deadline clock struck “midnight” on December 31, 2020 for reinvesting recognized capital gains occurring between April 1, 2020 and December 31, 2020 into in a Qualified Opportunity Fund.
Then the IRS issued Notice 2021-10 on Jan. 19, 2021 to reset that 180-day reinvestment clock. This means if your 180-day reinvestment clock starts ticking on, or after, April 1, 2020, the deadline alarm won’t “chime” until March 31, 2021. What if your capital gain was realized on July 15, 2020? The reinvestment deadline is March 31, 2021. What about August 31, 2020? The deadline is still March 31, 2021.
And, that new deadline encompasses an added look-back opportunity. Specifically, if your capital gain was realized as far back as October 4, 2019, you can still deploy that gain into a Qualified Opportunity Fund -- if you have not done so -- on or before March 31, 2021.
Other Notice 2021-10 issues that might be of interest are as follows.
Substantial improvement. The substantial improvement requirement -- which could be considered the heart of the QOZ program -- mandates that the QOF in which you invest has 30 months from the time it acquires an asset to substantially improve it. This means that the QOF must double a property’s adjusted basis in that time period to qualify as a QOZ asset. But thanks to Notice 2021-10, if that 30-month period falls anywhere between April 1, 2020 and March 31, 2021, it’s tolled, or disregarded.
The 90% test. Another important aspect of the QOZ program is that the QOF must hold at least 90% of its assets in Qualified Opportunity Zone Properties (QOZP). To ensure it adheres to this particular goal, QOFs undergo semi-annual testing dates (typically June 30 and December 31), with non-compliance meaning likely penalties. In the face of COVID-19 the IRS tweaked this requirement. A QOF failing to meet that 90% standard between April 1, 2020 and June 30, 2021, won’t be penalized.
As with anything involving investments, especially QOF/QOZ investments, it’s important to check with your financial or tax advisor. In the meantime, you have additional breathing room when it comes to figuring out what QOF in which to place your capital gains. But keep in mind that the clock is ticking. It’s better to act sooner, rather than later, to ensure proper QOF investment, and potential tax deferral.
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