January 20, 2021

IRS Extends COVID-19 Relief for Qualified Opportunity Funds and OZ Investors

On January 19, 2021, the IRS issued Notice 2021-10, which further extends relief previously granted to taxpayers, Qualified Opportunity Funds (QOFs), and Qualified Opportunity Zone Businesses (QOZBs) under the Opportunity Zone Program due to the COVID-19 pandemic under Notice 2020-39 (issued on June 4, 2020) and Notice 2020-23 (issued on April 9, 2020).

The Opportunity Zone Program provides certain tax incentives to encourage the reinvestment of capital gains derived from any source (e.g., sale of stock, sale of business assets, sale of real estate) as long-term equity investments into real estate projects and new businesses located in designated “opportunity zones.” Such investments must generally occur within a 180-day period in order to be eligible for the tax benefits afforded under the Opportunity Zone Program.

Pursuant to Notice 2021-10, if the 180-day investment period would have otherwise expired between April 1, 2020 and March 31, 2021, the deadline to re-invest the capital gains into a QOF has been extended to March 31, 2021. Thus, taxpayers who have incurred capital gains between October 4, 2019 and October 2, 2020 now have until March 31, 2021 to invest all or a portion of their capital gains into one or more QOFs in accordance with the requirements of the Opportunity Zone Program.

Additional relief afforded under Notice 2021-10 includes:

  • The automatic application of the “reasonable cause” exception to any QOF that fails to satisfy the 90% investment standard (i.e., at least 90% of the QOF’s assets must constitute “qualified opportunity zone property”) (i) during the last day of the first 6-month period of a taxable year, or (ii) the last day of a taxable year falls within the period beginning on April 1, 2020 and ending on June 30, 2021. As cash held by QOFs does not constitute “opportunity zone property,” QOFs have deadlines to purchase opportunity zone property (i.e., stock or partnership interest in a QOZB or qualified opportunity zone business property); however, under Notice 2021-10, QOFs will not be penalized in the event that they are unable to timely deploy certain cash investments to purchase qualified opportunity zone property before June 30, 2021.
  • The 30-month “substantial improvement” requirement for property held by QOFs and/or QOZBs is tolled for the period between April 1, 2020 and March 31, 2021. Thus, the deadline for developers to substantially improve certain projects in accordance with Opportunity Zone Program requirements may now be extended by up to one (1) year.
  • Unlike QOFs, QOZBs may hold certain cash assets for a period of up to 31 months due to a working capital safe harbor, subject to compliance with the Opportunity Zone Program requirements. Pursuant to Notice 2021-10, qualified QOZBs holding working capital assets intended to be covered by the working capital safe harbor before June 30, 2021, may be entitled to an additional 24 months (i.e., up to 55 months total) to deploy the working capital assets of the QOZB.

    • The Opportunity Zone Program has resulted in significant investments in numerous redevelopment projects and new businesses in opportunity zones in New Jersey and elsewhere throughout the country; however, compliance with the Opportunity Zone Program’s regulatory requirements is complex and has become that much more difficult to due to the numerous challenges created by COVID-19. MSW’s full-service commercial real estate team is prepared to assist its clients organize and form QOFs and QOZBs, evaluate and participate in opportunity zone investment opportunities, and comply with other regulatory and tax requirements in order to maximize the many benefits of the Opportunity Zone Program all while addressing the numerous other land use, transactional, environmental and regulatory challenges associated with acquiring, developing and operating real estate projects.

    For more information, please contact Matthew J. Schiller, Esq. at (973) 705-7431 or mschiller@murphyllp.com.

    Murphy Schiller & Wilkes LLP (MSW) is a boutique law firm servicing the commercial real estate and construction industries. Headquartered in Newark, New Jersey, the firm represents a wide range of clients, including institutional, publicly traded real estate companies, international and regional lenders, national contractors and subcontractors, and family offices. The firm has been ranked as a top law firm by both Chambers & Partners and U.S. News & World Report.