On January 19th, IRS issued Notice 2021-10, which contains critical guidance on timing deadlines for Opportunity Fund investment. The biggest takeaway: taxpayers with capital gains dating as far back as January of 2019 may still be able to invest those gains into Opportunity Funds and claim tax benefits – even if they have already paid taxes on those capital gains – as long as they invest before March 31, 2021.
Normal Gain Timing. Under normal circumstances, two rules govern how long a taxpayer with a capital gain has to make an Opportunity Fund investment:
- If gain came directly to taxpayer (e.g., taxpayer sold stock they owned or a rental property held in their name) – 180 days from the day the gain happened.
- Example: Sue sold some Gamestop stock she bought several years ago on January 27, 2021. She would have until July 26, 2021 to invest her gains into an Opportunity Fund.
- If gain came to the taxpayer through a pass-through entity, like an LLC (e.g., taxpayer sold a business, sold off a partnership interest, or sold a property they held with others) – 180 days from when the pass-through entity’s tax return is due, which typically means September 15 of the year after the gain happened.
- Example: Bob is a member of a partnership/investment group that sold a project on January 5, 2021. Bob would have until September 15, 2022 to invest his capital gains into an Opportunity Fund.
There is no direct tracing requirement for making an Opportunity Fund investment. In other words, Sue could spend the actual money she made on her Gamestop stock sale today, but as long as she invests an equivalent amount of cash into an Opportunity Fund before August 1, she can claim the Gamestop gain as the “triggering event” for her Opportunity Fund investment.
Extended Gain Timing – Notice 2021-10 Update. Because of the COVID-19 pandemic, the IRS decided to significantly extend the deadlines for Opportunity Fund investment.
- Direct / Individual Gains – anyone with an individual gain event from October 1, 2019 to September 31, 2020 has until March 31, 2021 to make an Opportunity Fund investment.
- Pass-Through Gains – anyone with a pass-through gain event from January 1, 2019 through December 31, 2019 has until March 31, 2021 to make an investment. (Remember – those with 2020 pass-through gains still have until September 15, 2021).
Most taxpayers have already paid capital gains taxes on their 2019 gains. However, the IRS has issued separate guidance that taxpayers can amend prior returns to retroactively claim an Opportunity Zone investment – if their investment falls within the timing guidelines issued above. Here’s a practical example of how this would work:
- Anna sells her business (a partnership) in February 2019, creating $100,000 in capital gains.
- Anna filed her 2019 taxes in June 2020, paying capital gains tax on the $100,000 in gains from her business sale in 2019.
- Anna identifies a $100,000 OZ investment in February 2021 and makes that investment by March 29, 2021, using available cash from her savings account.
- When Anna and her accountant go to file her 2020 taxes (at some point in 2021), they will also file an amended return for 2019, showing that Anna deferred her capital gains taxes on the $100,000 gain in question and retroactively claiming a credit for the tax she paid.
If you have questions on how these rules might apply, please reach out to us at [email protected].
Other Timing Updates. Notice 2021-10 provided some other taxpayer-friendly updates to OZ timing rules. These include:
- Substantial Improvement Period. A rehabilitation project typically has 30 months to double its cost basis (the “substantial improvement” requirement). Notice 2021-10 tolls that period from April 1, 2020 through March 31, 2021 – giving taxpayers an extra year to meet the 30 month “substantial improvement” threshold for a deal.
- 90% Test and Opportunity Fund Deployment. Opportunity Funds typically have six to twelve months to deploy 90% of the capital they raise into qualifying Opportunity Zone investments. Under Notice 2021-10, any Opportunity Fund that was capitalized in 2020 has until December 31, 2021 to meet that 90% deployment test.
- Working Capital Safe Harbor. Qualified OZ businesses have a set period during which they must spend down the capital they raise from an OZ investor. Notice 2021-10 extends that period by up to 24 months.
About Opportunity Alabama. Opportunity Alabama is the 501(c)(3) economic development engine for Alabama’s low-income places. Since 2018, we have built an ecosystem for investment in Alabama’s Opportunity Zones that has resulted in more than $150 million in private investment – work that won us the Forbes OZ Catalyst Grand Prize. We provide technical assistance to communities, developers, and investors on how to leverage the Opportunity Zones incentive – and do so in a way that creates meaningful returns for Alabama’s low-income places. For more information, please contact us ([email protected]).
Disclaimer: The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. Nothing herein is intended to provide tax, legal, or investment advice and nothing herein should be construed as a recommendation to buy, sell, or hold any investment or security or to engage in any investment strategy or transaction. You should seek consultation with legal and financial experts prior to participating in any aspect relating to Opportunity Zones.