The potential tax deferral benefits of Opportunity Zones for capital gains from the disposition of commercial real estate as an alternative to Section 1031 exchanges has been a recurring topic in this blog ever since that program was passed into law by Congress with the Tax Cuts and Jobs Act in late 2017. Since adoption of that tax plan, its details have been fleshed out in several iterations of rulemaking issued by the IRS. Most recently, I wrote an article about this subject earlier this year, recapping the “final” regulations announced by the Treasury Department.
Since then, however, the coronavirus pandemic has wreaked havoc on the U.S. economy, which has focused governmental attention on mitigating its impacts. In this vein, the Treasury Department has issued a notice that makes changes to several of the requirements and deadlines relating to Qualified Opportunity Funds (“QOFs”) and their investors. Listed below are certain modifications announced by the IRS that offer relief regarding the use of Opportunity Zones.
- Investors who have disposed of property for gain that would qualify for deferral and who normally would have had only 180 days to invest in a QOF in order to defer that gain will now have more time in which to make that investment. If the investor’s 180th day to invest in the QOF would have occurred on or after April 1, 2020, that investor now has until December 31, 2020 in which to invest in a QOF to defer that gain. The notice also states that the time from April 1, 2020 to December 31, 2020, will not count towards the 30-month period during which property may be substantially improved.
- Because of the economic impact of the pandemic, the failure of a QOF to hold 90% of its assets in Qualified Opportunity Zone Properties on any semiannual testing dates occurring between April 1, 2020 and December 31, 2020 shall be treated as due to reasonable cause under the statute, and will not prevent that entity from qualifying as a QOF or an investment in that QOF from being treated as a qualifying investment. As a result, the QOF will not be subject to the penalty set forth under the statute for that failure during this time period.
- With respect to Qualified Opportunity Zone projects that satisfy the final regulations’ 31-month working capital safe harbor requirements, as a result of the effects of the pandemic, the new guidance allows these projects up to 24 additional months to utilize their working capital.
- Finally, as a further consequence of the impact of the pandemic, those QOFs that had either (a) received QOF stock distributions or partnership interests as a return of capital or (b) realized sale proceeds with respect to such stock, partnership interests or Qualified Opportunity Zone property, will have 12 additional months to reinvest them as originally intended to be reinvested before the pandemic.
For those of you who are interested in the particular details of this guidance, the Treasury Department notice may be found here. In addition, if you would like to see general information about other actions the IRS has taken to address the impacts of COVID-19, please visit the IRS website here.
Finally, in related Opportunity Zone pandemic news, Senator Tim Scott, one of the prime movers behind the creation of Opportunity Zones, has suggested to the IRS that Opportunity Zone programs could be used to persuade companies that supply medical equipment and personal protective equipment to return to the U.S. By bringing those businesses back to the U.S., doctors and nurses dealing with the pandemic could be better protected, according to Sen. Scott.