Inside the Opportunity Zone Relief Benefits
Commercial real estate attorney Phil Jelsma gives us an inside look at the IRS extensions and guidance for opportunity zones.
Last month, the IRS released new guidance for opportunity zone investments in relation to the pandemic. The benefits are potentially significant for opportunity zone investors, and extend several key deadlines. We talked to commercial real estate attorney Phil Jelsma, a partner and chair of the tax practice team at Crosbie Gliner Schiffman Southard & Swanson, to get some insight about IRS notice. Here are the key insights for opportunity zone investments.
- 180-Day Investment Requirement for Qualified Opportunity Zone Investors
Typically, investors have 180 days to reinvest capital gains in an opportunity zone fund and take advantage of the tax benefit. At the start of the pandemic, the deadline was delayed, but now it has been extended further. “Previously in Notice 2020-23, the IRS had extended the 180-day period for taxpayers whose 180-day investment period fell after April 1, 2020 until July 15, 2020,” says Jelsma. “Notice 2020-39 now extends that date until December 31, 2020. For example, if investor sold all of his or her stock on December 1, 2019 for a gain of $5 million, then the investor would normally have until May 28, 2020 to invest in a QOF. Now investor would have until December 31, 2020 to invest his or her capital gain in a QOF. The capital gain will be otherwise taxable for California income tax purposes.”
- 30-Month Substantial Improvement Test
In a standard qualified opportunity zone investment, the fund and its subsidiaries have 30 days to meet the substantial improvement guidelines. That deadline is now extended to the end of the year. “In the earlier example, if an investor contributes $5 million to a QOF, which then contributes the $5 million to a qualified opportunity zone business to acquire property with a purchase price of $4 million, $1 million of the purchase price is allocable to the building and improvements,” adds Jelsma. “Normally the QOZB would have to spend $1 million on improving the property by the end of May 2022. Under the Notice, the 30-month substantial improvement test would be extended to the end of February 2023.”
- 90% Investment Standard
The penalty for failing to meet the 90% investment standard, where the QOF provides that 90% of its assets have been invested in opportunity zone in a qualified property, is declassifying the fund as a QOF. “The Notice provides that the QOFs failure to hold at least 90% of its assets in QOZ property on any of its semi-annual testing dates from April 1, 2020, through December 31, 2020 is deemed to be to reasonable cause and this failure will not result in the QOF failing to be treated as a QOF or be subject to penalty,” says Jelsma.
- Working Capital Safe Harbor
Qualified opportunity zone businesses have up to 31 months to begin working capital meet the substantial improvement test. “The Notice adds an additional 24 months to expend working capital as long as the qualified opportunity zone business otherwise meets the requirements to qualify to meet the working capital safe harbor,” says Jelsma.
- QOF Reinvestment Period
Qualified opportunity zones have 12 months to reinvest any gains from the sale of a qualified property. That deadline has been extended by 12 months. “For example, if the QOZB sells the property that it substantially improved on December 1, 2020, the QOF would normally have until November 30, 2021 to reinvest the proceeds under the Opportunity Zone rules,” says Jelsma. “Now under the Notice, the QOF would have until November 30, 2022 to reinvest the proceeds in another QOZB.”