As the COVID-19 pandemic lingers, so does its impact on the real estate community. To mitigate the impact on Qualified Opportunity Funds (QOF) and Qualified Opportunity Zone (QOZ) investors specifically, earlier this week the IRS issued Notice 2021-10, which provides relief by extending provisions previously issued in April 2020 (Notice 2020-23) and June 2020 (Notice 2020-39).

Relief Extensions in This Most Recent Guidance Include:

180-day investment requirement for QOF investors

A taxpayer is generally given 180 days to invest a qualified gain into a QOF. In June 2020, the IRS extended this reinvestment period for some taxpayers until Dec. 31, 2020. Now, the IRS is further extending the reinvestment period. Where the original reinvestment period is set to expire between April 1,2020, and March 31, 2021, such reinvestment period is now automatically extended to March 31, 2021.

90% investment standard for QOFs

A QOF is required to hold at least 90% of its assets in Qualified Opportunity Zone property (QOZP).* The IRS stated in June that it would automatically ignore a QOF’s failure to meet its 90% investment standard test for QOFs whose last day of the first six-month period of the taxable year or whose last day of taxable year falls between April 1, 2020, and Dec. 31, 2020. The most recent guidance extends the date range to June 30, 2021. This essentially alleviates the need for many QOFs to maintain the 90% test for the testing date of June 30, 2021.

30-month substantial improvement period for QOFs and QOZBs

In the guidance release in June, the IRS permitted QOFs and Qualified Opportunity Zone businesses (QOZB) to disregard the months between April 1, 2020, and Dec. 31, 2020, when counting toward the 30-month substantial improvement timeline. Notice 2021-10 allows the months between April 1, 2020, and March 31, 2021, to be disregarded for the 30-month substantial improvement timeline.

QOZB working capital safe harbor

QOZBs are allowed a 31-month working capital safe harbor that allows them to treat working capital assets as “reasonable” and not cause them to fail their 90% asset test. The IRS confirms in this most recent guidance that all QOZBs that intended to utilize the 31-month working capital safe harbor before June 30, 2021, will receive up to additional 24 months to expend the working capital.

12-month reinvestment period for QOFs

A QOF that has a return of capital, sale, or disposition of QOZP is allowed a 12-month reinvestment period in which the proceeds can continue to qualify toward the 90% test if the proceeds are re-invested in other QOZP by the end of the 12 months.

Per this most recent guidance, if a QOF’s 12-month reinvestment period includes June 30, 2020, an additional 12 months are allowed to get the proceeds reinvested without negatively affecting the QOF’s 90% investment standard test.

Are QOZs Still a Good Investment Tool?

While the COVID-19 pandemic has devalued or derailed many investment incentives, QOZs are certainly not one of them. Investing qualified capital gains into a QOF can yield significant benefits, including:

Deferral of tax – An investor will defer recognition of the capital gain until Dec. 31, 2026, or the sale of the investment.
Reduction of tax – An investor that has held the investment for five years by the capital gain recognition date will only pay tax on 90% of the original deferred gain. If the holding period is seven years by that point, the investor will only pay tax on 85%.
Exclusion of tax – An investor that holds an interest in a QOF for at least 10 years will pay zero tax on the gain recognized upon disposition of such investment. This aspect has the potential to be a massive tax break and is one the most advantageous aspects of the QOZ program.

Please reach out to your KSM advisor to determine how this new guidance might affect your QOZ investments, or complete this form.

*Calculated by taking the average percentage of QOZP held by the QOF on the last day of the first six-month period of the QOF’s taxable year and on the last day of its taxable year.

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