Qualified Opportunity Zone Funds - Increased Time for Investments to Defer Taxable Income
Prior Tips have discussed the concept of a Qualified Opportunity Zone (QOZ) and a Qualified Opportunity Zone Fund (QOZF). This special QOZF law, passed under the Tax Cuts and Jobs Act of 2017, allows for taxpayers to sell qualified property generating a long term capital gain and to invest this gain amount in to a QOZF, thus deferring the tax on the gain. (There are other potential benefits of excluding the gain from the investment in the Fund, if the holding period in the investment meets certain time restrictions, such as a 5 year period to exclude 10% of the gain, a 7 year investment to exclude 15% of the gain, and a potential of excluding all of the QOZF gain if the qualified Fund investment is held 10 years or more.)
The above rules have been discussed in prior Tips. Refer to those tips for more information on the basic rules for a QOZF and the exclusions and deferrals.
The purpose of this Tip is to focus on a recent event that allows more time for an investor, selling property and generating long term capital gain, to defer the payment of taxes on this gain by investing in a QOZF.
The general rule is that a taxpayer attempting to defer gain from the sale of a capital asset has 180 days from the date of the sale to defer the gain.
However, because of Covid19 and the many problems and delays faced by investors in this Coronavirus setting, the government has extended, in some circumstances, the time the taxpayer has to make the reinvestment of the gain within a QOZF.
Under Notice 2021-10, the IRS allows the taxpayer, who is qualified, to have additional time for the investment of the gain and the deferral of the tax due on the gain.
The Notice stated:
“180-Day Investment Requirement for QOF Investors Section 1400Z-2(a)(1)(A) provides that if a taxpayer has “gain from the sale to, or exchange with, an unrelated person of any property held by the taxpayer,” the taxpayer may elect to exclude from gross income for the taxable year “so much of such gain as does not exceed the aggregate amount invested by the taxpayer in a [QOF] during the 180-day period beginning on the date of such sale or exchange” (180-day investment requirement). Section 1.1400Z-2(a)-1 provides definitions and rules to implement the 180-day investment requirement.”
The Treasury noted that there was prior relief granted to investors as to this 180 day rule. (See Notices 2020-23, 2020-39, and Code sections 1400Z and 7508A(a).) This newest Notice 2021-10 provides additional time for the reinvestment.
The new Notice 2021-10 states:
“180-Day Investment Requirement for QOF Investors If the last day of the 180-day investment period within which a taxpayer must make an investment in a QOF in order to satisfy the 180-day investment requirement falls on or after April 1, 2020, and before March 31, 2021, the last day of that 180-day investment period is postponed to March 31, 2021. This relief is automatic; taxpayers do not have to call the IRS or send letters or other documents to the IRS to receive this relief. However, a taxpayer will still need to make a valid deferral election in accordance with the instructions to Form 8949, complete Form 8997, and file the completed Form 8949 and Form 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 if section 1400Z-2(a)(1) did not apply to defer recognition of the gain. For additional information, see https://www.irs.gov/form8949 and https://www.irs.gov/form8997.”
Thus, the taxpayers have additional time to gain the benefits of Code Section 1400Z, deferring the gain generated from the sale of property that generated long term capital gain. The Notice makes it clear that the purpose of the extension in time to invest and defer the gain is “in response to the ongoing Coronavirus Disease 2019 (Covid-19) pandemic.”
Dr. Mark Lee Levine,
Professor, University of Denver