As a result of COVID-19, the IRS issued Notice 2020-39 on June 4, 2020 easing some of the rules on Qualified Opportunity Funds (QOFs). In April 2020, the IRS issued Notice 2020-23 that postponed some of the due dates, but now, Notice 2020-39 modifies the earlier notice and deals with several areas of rule relaxation for QOFs.
180-Day Investment Period
Under the Qualified Opportunity Zone (QOZ) rules, an investor has 180 days to make an investment in a QOF to avoid paying tax on the capital he/she is seeking to defer. The April notice extended that deadline, and now, in Notice 2020-39, if the last day of the 180-day investment period falls on or after April 1, 2020 and before December 31, 2020, the taxpayer has until December 31, 2020 to make the investment. This relief is automatic; however, the taxpayer still needs to make a valid deferral election.
90-Percent Investment Test
Under the QOZ rules, a QOF must hold at least 90% of its assets in Qualified Opportunity Zone Property (QOZP) on certain testing dates. If that requirement is failed, a penalty is imposed unless there was reasonable cause. Under Notice 2020-39, if the testing period falls within the period beginning on April 1, 2020 and ending on December 31, 2020, then any failure of the 90% test is deemed due to reasonable cause, and that failure will not prevent the QOF from qualifying as a QOF or its investments as qualifying as a qualifying investment.
30-Month Improvement Period
If the QOF acquires a property, and it is not the original user, it must then “substantially improve” the property during any 30-month time period beginning after acquisition. In Notice 2020-39, for purposes of the 30-month test, the period beginning on April 1, 2020 and ending on December 31, 2020 is disregarded in determining any 30-month substantial improvement period.
Working Capital Safe Harbor
A Qualified Opportunity Zone Business (QOZB) has up to 31 months to spend working capital to substantially improve its QOZP. A QOZB can extend the working capital safe harbor to 62 months, if certain requirements are met. In addition, a QOZB, in a federally-declared disaster area can receive an additional 24 months to expend its working capital. As a result of the entire U.S. becoming a federally-declared disaster area due to COVID-19, a QOZB, if it satisfies the applicable requirements, now has up to 86 months to expend its working capital.
12-Month Reinvestment Period
If a QOF sells some or all of its QOZP, and the QOF holds the proceeds in cash, cash equivalents or debt instruments with a term of 18 months or less, then reinvests some or all of the proceeds in a QOZP by the last day of the 12-month period, then the proceeds, to the extent they are so reinvested, are treated as QOZP for the 90% test. The June 4 notice provides that if any QOF’s 12-month reinvestment period includes January 20, 2020 – the date of the Major Disaster Declaration – that QOF is granted an additional 12 months to reinvest in a QOZP.
Contact Jackie Matsumura, Real Estate Industry Group co-leader and tax partner, or Greg Dresdow, senior tax advisor, for more information.
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