Taxpayers who are, or are considering, participating in opportunity zones may be wondering how the coronavirus will affect such investments. While certain deadlines have automatically been extended and others have been extended by exercise of IRS authority, other deadlines have not been extended. Below is a summary of the impact of the coronavirus pandemic on taxpayers participating in opportunity zone investments:
- Generally, an investor must reinvest capital gains within 180 days of the transaction that produced such capital gains. For an investor with capital gains for which the 180-day reinvestment deadline falls between April 1, 2020 and July 15, 2020, that deadline is extended to July 15, 2020, without further action required by the investor. Thus, for example, an investor with a gain for which the rollover period would have ended on April 3, 2020 now has until July 15, 2020 to invest in a qualified opportunity fund. The extension is automatic, so the investor does not need to file an extension form to obtain the benefit of the extended rollover period.
- The COVID-19 pandemic has resulted in numerous states being declared federal disaster areas, including the following initial, larger states: New York, Washington, California, New Jersey, Florida, Texas, North Carolina, and Louisiana. For opportunity zone projects that are located in such federally declared disaster areas, two extensions may apply:
- Typically, opportunity zone businesses (QOZBs) can hold cash in excess of the 5% standard for a period of up to 31 months if (1) there is a written plan that identifies the cash as held for the acquisition, construction, or substantial improvement of opportunity zone property; (2) there is a written schedule showing that the cash will be used within 31 months; and (3) the business substantially complies with the written schedule. This usual 31-month working capital safe harbor may be extended by an additional 24 months if the project is delayed because of the COVID-19 outbreak and it is located in a federally declared disaster area. The QOZB must spend the proceeds consistent with the plans that it had in place before the disaster delayed their expenditure.
- A qualified opportunity zone fund (QOF) is allowed 12 months from the date of the distribution, sale, or disposition of qualified opportunity zone stock, qualified opportunity zone partnership interests, or qualified opportunity zone business property to reinvest proceeds from such transaction in other qualifying property. The 12-month period that a QOF has to reinvest the proceeds of sales of parts of its assets may be extended by an additional 12 months if the relevant opportunity zone project is located in a federally declared disaster area. The QOF must invest the proceeds in a manner consistent with the plans that it had in place before the disaster delayed such investment.
- Under the existing opportunity zone program (OZ Program) regulations, the working capital safe harbor period and the period for reinvestment by a QOF (both described above) may be extended if a delay in government permitting causes a delay of the relevant project. Thus, for example, if there is a delay in government approvals necessary for renovation or construction work on a project to proceed, this existing deferral provision is available in the COVID-19 context to enable an extension for the period of delay.
- Interested parties have requested that the IRS provide COVID-19-based relief on many of the other deadlines in the OZ Program, such as the testing dates for QOF status (i.e., the date by which a QOF must invest available cash in eligible projects) and the period for substantial improvement of property in order for such property to qualify as qualified opportunity zone business property, among other things. In addition, the IRS has not issued any guidance regarding how an affected taxpayer would claim the benefits of the above extensions. We are continuing to monitor IRS notices for any additional relief that may be made available to participants in the OZ Program and will update this guidance accordingly if any notices are issued.