The IRS continues to provide much needed relief to Opportunity Zone Funds and their investors in response to the COVID-19 pandemic. On January 19, 2021, the eve of President Trump’s last day in office, the IRS issued Notice 2021-10 (the "Notice") extending and expanding multiple deadlines, eligibility, and testing requirements for the Opportunity Zone program. The new relief is in addition to the relief previously granted by the IRS in 2020.
Relief for Investors
Extension of 180 Day Deadline. Investors seeking to take advantage of the Opportunity Zone program must invest eligible capital gains into an Opportunity Zone Fund within either (a) 180-days of the date the capital gain was realized, or (b) for gains realized by an investor through a pass-through entity, within 180-days of the pass-through entity’s taxable year-end. Under prior relief, 180-day periods ending on or after April 1, 2020 and prior to December 31, 2020 were extended to December 31, 2020. The Notice extends the 180-day expiration date from December 31, 2020 to March 31, 2021. This means that capital gains realized on or after October 5, 2019 remain eligible to invest in an Opportunity Zone Fund until March 31, 2021.
Relief for Opportunity Zone Funds
Extension of the 30-month substantial improvement period. Real property investments by Opportunity Zone Funds must be substantially improved within 30-months of acquisition. The Notice tolls (i.e., ignores) the period of time between April 1, 2020 and March 31, 2021 for purposes of calculating this 30-month period. This means that if an Opportunity Zone Fund acquired property on March 31, 2020, then as of March 31, 2021, no part of the 30-month period will have elapsed.
Penalty relief for the 90% Test. An Opportunity Zone Fund must hold at least 90% of its assets in qualifying property, as determined on two semiannual testing dates. A penalty is imposed on Opportunity Zone Funds failing the 90% test. No penalty is imposed if the Opportunity Zone Fund has reasonable cause for its failure to satisfy the test. The Notice extends prior relief by directing that any 90% test failures falling between April 1, 2020 and June 30, 2021 are excused due to reasonable cause and no penalties will be imposed.
Working capital safe harbor. Opportunity Zone Funds have a limited ability to hold non-qualifying financial assets such as bank deposits and cash investments. One exception to this general rule is that Opportunity Zone Funds may hold excess non-qualifying financial assets as working capital for up to 31-months by complying with administrative requirements. The Notice extends this 31-month safe harbor by an additional 24-months to 55-months. To qualify, the working capital in question must be held by the Opportunity Zone Fund prior to June 30, 2021.
12-month reinvestment period for Opportunity Zone Funds. An Opportunity Zone Fund must generally hold its assets for a minimum of ten years to enable investors to maximize tax benefits of the Opportunity Zone program. Where an Opportunity Zone Fund sells an investment ‘early’, the program permits an Opportunity Zone Fund to acquire a replacement investment within 12-months from the date of sale. The Notice extends the 12-month reinvestment periods with original expiration dates falling on or after June 30, 2020 by an additional 12-months. For example, an Opportunity Zone Fund selling property on January 1, 2020 has until January 1, 2022 to acquire replacement property.
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The IRS continues to respond to the ongoing COVID-19 pandemic. The tax attorneys at McLaughlinQuinn LLC have worked with Opportunity Zone Fund sponsors and investors since the program’s inception and strive to remain at the forefront of this changing legal landscape. For more information on this newsletter, contact Cory J. Bilodeau, Esq., LL.M., Tax Planning Partner, at (401) 655-2203 or via email at