The IRS issued Notice 2021-10 on January 19, 2021 extending the deadlines for Qualified Opportunity Funds (QOFs) and investors in those funds who have been impacted by the pandemic. The notice provides relief to Qualified Opportunity Funds, investors, and Qualified Opportunity Zone Businesses (QOZB) with greater flexibility given to those who failed to meet regulations because of the coronavirus pandemic. The notice extends the deadline from prior Notice 2020-39 back on June 4, 2020.
180-Day Investment Requirement for Investors
Typically, investors have 180 days beginning on the date of a sale or exchange to invest eligible gains from property sold into a QOF to defer taxes on this gain. The Qualified Opportunity Fund relief provided by Notice 2021-10 states that if the 180th day to invest in a QOF occurs on or after April 1, 2020 and prior to March 31, 2021, those investors now have until the revised date of March 31, 2021 to invest their eligible gains into a QOF.
90% Investment Standard
Under normal circumstances, a QOF must hold 90% of its assets in Qualified Opportunity Zone Property on semi-annual testing dates or they will be penalized. The Qualified Opportunity Fund relief provided by Notice 2021-10 states that, due to the COVID-19 pandemic, a QOF’s failure to satisfy the 90-percent investment standard is due to reasonable cause and no penalty will be incurred, providing that either the last day of the first 6-month period of the QOF’s taxable year or the last day of the QOF’s taxable year falls between April 1, 2020 and on or before June 30, 2021.
30-Month Substantial Improvement Period for Qualified Opportunity Funds
Usually, a Qualified Opportunity Fund must substantially improve the Qualified Opportunity Zone property it has acquired within a 30-month period if that property is pre-existing. Notice 2021-10 provides additional Qualified Opportunity Fund relief by suspending the 30-month substantial improvement period between April 1, 2020 and March 31, 2021.
In addition to the relief provided to Qualified Opportunity Funds and investors, Notice 2021-10 gives relief to QOZB in the form of further extensions. QOZBs holding working capital with the intention of it being covered by the 31-month safe harbor before June 20, 2021 can now receive up to an additional 24 months in which to spend working capital on qualifying the property. The previous extension applied to working capital intended to be covered by the safe harbor before December 31, 2020. Additionally, it extends the reinvestment period for QOFs. Traditionally, if a Qualified Opportunity Fund sells Qualified Opportunity Zone property or receives a distribution for a QOZB, the QOF needs to reinvest the proceeds within 12 months. Under the revisions, if the QOF’s 12-month reinvestment period includes June 30, 2021, they will be given up to an additional 12-month period to reinvest.