As the country begins to (somewhat) return to normal, real estate investors involved in both qualified opportunity funds (QOFs) and qualified opportunity zone (QOZ) property received additional guidance from the IRS when on June 4 the agency issued Notice 2020-39, which includes a number of extensions for key timing and testing requirements. As outlined in the notice, the extensions are automatic. This means a taxpayer does not need to reach out to the IRS via phone or letter to receive relief, though they are still responsible for the timely filing of Forms 8949, 8996 and 8997 with their annual returns.
An important extension involves the 180-day deadline to reinvest capital gains, a requirement that begins on the date of a sale or exchange of property. The new deadline has been extended from July 15 (as noted in previous IRS Notice 2020-23) to December 31.
Another modification affects the requirement for the QOF to hold at least 90% of its assets in a QOZ. Previously, if the 90% threshold would fail on a testing date, the QOF could face severe penalties. For QOFs whose asset test date falls between April 1 and December 31, failure to satisfy this requirement due to reasonable cause is now disregarded. If this extension is applicable to the QOF, Form 8996, Part IV, Line 8 (Penalty) should include a “0”.
For a property to receive treatment as a qualified opportunity zone business property (QOZBP), the investment must satisfy three general requirements, one of which concerns the substantial improvement of post-2017 tangible property. A QOF, for instance, during any 30-month period beginning after the acquisition date of the property, must make additions to the basis of the property. With issuance of Notice 2020-39, the period between April 1 and December 31 is now disregarded for the purposes of determining the 30-month substantial period.
Another requirement for a property to qualify as a QOZBP is the working capital safe harbor, which restricts QOFs to hold less than 5% of assets in nonqualified financial property. There’s also a written schedule consistent with the ordinary startup of a trade or business for the expenditure of working capital assets within 31 months of receipt of the assets. A QOZ may now extend this safe harbor period to a maximum 55-month period if the QOF was relying on the safe harbor before December 31, 2020.
Schneider Downs will continue to monitor all developments related to qualified opportunity zones as updates are released. Please contact your SD tax advisor if you have any questions, or would like to discuss the provisions of the CARES Act and or the Families First Coronavirus Response Act. Also, be sure to visit our Coronavirus resource page for related content.
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