The IRS has issued Notice 2020-39, which extends various deadlines for Opportunity Zone (OZ) Funds and investors due to the COVID-19 pandemic. (Learn more about Opportunity Zones and how they work here.) This Notice provides additional time for those investors to deploy OZ Funds and still receive OZ benefits. Below is a summary of the various extensions:
180-Day Investment Requirement for OZ Investors
OZ investors can invest their capital gains into a Qualified Opportunity Fund (QOF) and defer the taxation of the gain and potentially reduce the amount of the gain. Generally, this investment must happen within 180 days after the capital gain. If the 180-day period ends between April 1, 2020 and December 31, 2020, the investor has until December 31, 2020 to make an investment in the QOF.
90-Percent Investment Standard for QOFs
In order to be a QOF, 90 percent of the Fund’s assets must be in qualifying OZ assets. This is tested semi-annually. The Notice states that if a QOF fails to meet the 90-percent test during a testing window between April 1 and December 31, 2020 due to the COVID-19 pandemic, any penalties will be waived.
30-Month Substantial Improvement Period
OZ businesses have 30-months to spend OZ Funds and make substantial improvements to real estate. The Notice states the 30-month period is tolled during the period beginning on April 1, 2020 and ending on December 31, 2020. This allows OZ businesses additional time to deploy OZ Funds for improvements.
24-Month Extension of Working Capital Safe Harbor Spending
OZ businesses can hold excess cash under the 31-month working capital safe harbor without affecting their status as OZ businesses. Since there is a disaster declaration, any OZ business that is holding working capital before December 31, 2020 can receive up to an additional 24 months to spend the working capital on qualifying property.
12-Month Extension of Reinvestment Period
A QOF has 12 months to reinvest proceeds returned from a sale of an OZ business or property and still keep gains deferred. If any part of the 12-month deferral period includes January 20, 2020, the reinvestment period is extended up to an additional 12 months due to the disaster declaration.
Learn More about Opportunity Zones
If you have any question as to how these changes might affect you, your Opportunity Zone Funds or businesses, please contact your Warren Averett advisor or have a member of our team reach out to you.