Still Time to Invest 2019 Gains in Opportunity Zones

The COVID-19 pandemic, coupled with an election that still hasn’t been certified, has created questions surrounding Opportunity Zones (OZ) investments today, and investors are watching closely to see how they will be affected moving forward.

However, as a reminder, the IRS issued pandemic-related compliance relief in June that relaxed many of the program’s timing requirements for the remainder of 2020, which means there’s still time to invest 2019 gains in OZs this year.

Where Do OZs Stand Now?

The final, official results of the presidential election likely will dictate any changes made to OZ investments and the process moving forward.

Numerous bills have been introduced in the past three years proposing to expand and enhance the OZ incentive, while others seek to eliminate or limit the reach of the program. Legislators also have proposed measures to require more transparency into where and what types of investments are being made and modifications to reporting on how low-income residents and communities benefit from OZ investments.

While none of the above is final, the Windham Brannon team will continue to monitor any and all developments moving forward and provide you with the information necessary to help you make informed decisions on OZs.

What Impact Have OZs Had?

QOFs raised an estimated $75 billion in private capital by the end of 2019, most of which may not have occurred in OZs without the incentive, according to The White House Council of Economic Advisers’ Impact of Opportunity Zones: An Initial Assessment report, released August 24, 2020.

This QOF private capital represents 21% of total annual investment in OZs, with private equity investment in businesses in OZ growing by 29% compared to businesses in eligible communities not designated as OZs. The report finds that every $1 raised by QOFs under the OZ incentive had a direct forgone federal revenue effect of 15 cents, and QOF-supported projects could decrease poverty in OZs by 11%. By comparison, each $1 in investment spurred by the New Markets Tax Credit results in 18 cents of forgone revenue.

The CEA estimates OZ designation alone has caused a 1.1% increase in housing values, and that increase provides an estimated $11 billion in new wealth for the nearly half of residents in OZs who own their homes.

There’s Still Time to Invest 2019 Gains!

With the IRS’ relief issued in June regarding OZ-related investments pushing back deadlines, investors still have multiple opportunities to make investments before the end of 2020. Here are a few of the major opportunities and updates that could impact your decision and strategy.

180-Day Investment Requirement for QOF Investors. The IRS, in Notice 2020-39 released in June, extended the required date to invest an eligible gain in exchange for a QOF investment to satisfy the 180-day requirement to December 31, 2020. This applies to any investment period that ended or will end between April 1, 2020, and before December 31, 2020.

Two examples of where this deadline would be extended to December 31, 2020, with respect to an eligible gain created in 2019:

  • A taxpayer directly sells an asset on or after October 4, 2019, generating an eligible gain; and
  • A taxpayer is allocated an eligible gain on December 31, 2019, from a calendar year pass-through entity that sold an asset and generated the eligible gain in 2019.

The extension is automatic; however, investors still need to make a valid deferral election and file the completed Forms 8949 and 8997 with a timely filed federal income tax return (including extensions) or amended Federal income tax return for the taxable year in which the gain would be recognized.

90% Investment Standard. Any failure to satisfy the 90% requirement by a QOF whose last day of the first six-month period of the taxable year or last day of the taxable year falls within the period beginning on April 1, 2020, and ending on December 31, 2020, is disregarded for purposes of determining whether the QOF or any otherwise qualifying investments in that QOF.

This means a calendar-year QOF that failed its June 30, 2020, and December 31, 2020 testing dates as a result of not converting enough invested cash received in December 2019 to equity in a QOZB would not be subject to a penalty.

This relief is automatic, and QOFs do not have to call the IRS to receive this relief.

24-month Extension of Capital Safe Harbor. As a result of the federal emergency declaration related to the COVID-19 pandemic, all Qualified Opportunity Zone Businesses (QOZB) that plan to use working capital assets intended to be covered by the working capital safe harbor (WCSH) before December 31, 2020, are now eligible to spend the working capital assets of QOZB for up to an additional 24 months.

QOZBs normally can apply up to two consecutive 31-month WCSH periods to carry out a written plan for the aforementioned purposes. As a reminder, an entity can be considered a QOZB if at least 70% percent of the tangible property owned or leased is opportunity zone business property.

The IRS has not stated if this is an automatic extension, so document wisely.

12-Month Reinvestment Period for QOFs. If any QOF’s 12-month reinvestment period included January 20, 2020, that QOF will receive up to an additional 12 months to reinvest in qualified OZ property some or all of the proceeds received by the QOF from the return of capital or the sale or disposition of some or all of the QOF’s qualified opportunity zone property.

30-Month Substantial Improvement Period. For the period beginning April 1, 2020, and ending December 31, 2020, the 30-month period for substantial improvement of tangible property with respect to property held by a QOF or QOZ is tolled.

If a QOZB has acquired tangible property prior to December 31, 2020, and cannot meet the original use requirement, such as occupying a building in an OZ, the period of time will not count against the 30-month substantial improvement period starting on the later of:

  •  the acquisition date, or
  • the period starting April 1, 2020, and ending December 31, 2020.

Other 2020 OZ Developments to Watch

In addition to the pending presidential election and other proposed legislation mentioned above, here are few other developments in 2020 worth watching in regard to OZ investments:

  •  Federal agencies must give Opportunity Zones preference when locating, expanding or relocating offices and other facilities except where they’re prohibited or hindered by cost and security concerns, according to an August 24, 2020, executive order by President Trump.
  • While Rep. Jennifer González-Colón, R-Puerto Rico, introduced a bill on July 6, 2020, to designate all of Puerto Rico as an Opportunity Zone, there had been no movement of bill as of November 11.
  • Banks can participate in Opportunity Zone investments after five federal regulatory agencies jointly issued a final rule on June 25, 2020, that exempts QOFs from the Volcker Rule, which prevents banking entities investing in, sponsoring or having certain relationships with covered funds.
  • The IRS released a draft of Form 8997 Initial and Annual Statements of QOF investments, which adds a column for a special gain code and questions relating to foreign eligible taxpayers. The final form has not been released as of November 11.
Key Takeaway

The good news is you still have time if you haven’t been able to fulfill your OZ investment requirements or explore new opportunities. However, the window is closing as the end of the year rapidly approaches.

To learn more about how you can save on capital gains through OZ investments, contact Windham Brannon’s Gary Gruner at ggruner@windhambrannon.com.

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