Investors wishing to participate in the US Government's Opportunity Zone (OZ) Program now have extra time to meet the requirements. The program, created as part of the 2017 Tax Cuts and Jobs Act, incentivizes taxpayers to invest in Qualified Opportunity Zones deemed to be "economically distressed."

On January 19, 2021, the IRS issued Notice 2021-10, which delayed several essential deadlines. The following are the key points investors need to know.

Rollover Deadlines

Initially, investors wishing to participate in the OZ program were allowed 180-days from the date of their property sale to roll their capital gains into a Qualified Opportunity Fund (QOF). Last year, the IRS issued Notice 2020-39, which extended any 180-day period that ended between April 1, 2020, and December 30, 2020, to December 31, 2020.

Citing the impact of COVID-19, the new notice extends these deadlines once again. Now, investors have until March 31, 2021, to roll over their capital gains.

"Late" OZ Formations

These new extensions have created some taxpayers' opportunity to amend their 2019 tax returns and invest their capital gains into the OZ program. Specifically, this applies to taxpayers that had K-1 or non-K1 "directly held" capital gains on or after October 5, 2019.

Also, taxpayers who have generated "direct" or indirect (ex. K-1) capital gains with an original deadline that fell on or after April 1, 2020, now have until March 31, 2021, to complete their rollovers.

If you had K-1 capital gains in 2020, you would generally have until September 10, 2021, to take advantage of the OZ Program. The latest IRS notice does not impact this deadline.

Investment Testing

Since the purpose of opportunity zones is to help develop and improve distressed areas, the program also requires QOFs to invest at least 90 percent of their assets into Qualified Opportunity Zone properties. Twice a year, all QOFs are tested to ensure they meet this requirement. If they don't, they're subject to a penalty.

Notice 2021-10 states that any funds that fail semi-annual tests between April 1, 2020, and March 31, 2021, are not subject to penalty. They also will not be disqualified as a QOF. Both of these exemptions only apply if the fund can show "reasonable cause" for failing to meet the test.

Other Deadline Extensions

In addition to the 90% investment rule, QOFs must also show "substantial improvement" to the acquired Qualified Opportunity Zone within 30 months of the acquisition date. Notice 2021-10 excludes the period running from April 1, 2020, to March 31, 2021, from this total 30-month period.

For example, QOZ property acquired on January 1, 2020, has a 30-month period that initially would have ended on June 30, 2022. However, under the new rules, the deadline will be extended out an additional 12-months, making the new deadline June 30, 2023.

The notice also extends deadlines for the program's working capital safe harbor period and reinvestment period. One of the requirements for meeting the working capital safe harbor is having a written schedule of expenditures within 31 months. Under the notice, this period is extended another 24 months, for a total of 55 months.

QOFs that sell a property or receive distributions must reinvest their proceeds into a qualified property within 12 months. For reinvestment periods that include June 20, 2020, these 12 months extend an additional 12 months, for a total of 24 months.

The Bottom Line

The new deadlines discussed above create potential opportunities that investors should not ignore. If you have $200,000 or more of short-term or long-term capital gains in the 2019 or 2020 calendar year, it makes sense to take a closer look at whether a QOF is right for you.

Taking advantage of this program could allow you to defer your capital gains until 2026. If you leave the funds invested in the QOF for ten years or longer, you may also achieve full federal (and possibly state) exemption on all appreciation.

Before making any significant financial decisions, it's always wise to consult with a qualified tax advisor and a financial professional. To learn more about how Fortitude Investment Group can help in your current situation, please contact our team

Daniel Raupp

Under Daniel Raupp's guidance since 2000, Fortitude Investment Group, LLC has guided clients into over $1 billion worth of securitized real estate investment offerings directly and indirectly, in both the DSTs for 1031 Exchanges and REITs. In the areas of real estate, tax advantaged investments, insurance, retirement, and estate planning, he is able to set up comprehensive, individually tailored client portfolios designed to help remove market volatility and maximize income potential without undue risk.

Inspired by his father’s dedication to customer service and hard work, Daniel directs a range of strategic initiatives in the firm to successfully leverage core competencies in tax efficient investing, alternative investments, and operational excellence to create customer value. His credentials include a Series 7 General Securities Representative (GS) License, Series 24 Principal of General Representatives License, Series 63 Uniform Securities Agent License, and a Life/Accident and Health Agent License. Check Daniel’s background on FINRA’s BrokerCheck.

This is for informational purposes only and is not an offer to buy/sell an investment. There are risks associated with investing in Delaware Statutory Trust (DST) and real estate investment properties including, but not limited to, loss of entire principal, declining market value, tenant vacancies and illiquidity. Diversification does not guarantee profits or guarantee protection against losses. Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated. Because investors situations and objectives vary this information is not intended to indicate suitability for any particular investor. This information is not meant to be interpreted as tax or legal advice. Please speak with your legal and tax advisors for guidance regarding your particular situation.

Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Advisory services offered through Concorde Asset Management, LLC (CAM), an SEC registered investment adviser. Insurance products offered through Concorde Insurance Agency, Inc. (CIA) Fortitude Investment Group is independent of CIS, CAM, and CIA.

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