The IRS recently extended the 180-day window for investors to roll capital gains into qualified opportunity funds, but investors may have tools at their disposal for stretching that window even further.
“There [are] all kinds of options here,” Dustin Stamper of Grant Thornton LLP said during a June 24 webcast hosted by his firm and the Tax Executives Institute.
Taxpayers looking to take advantage of Opportunity Zone benefits typically have 180 days from the date they recognize a gain to invest that money in a QOF, but in response to the COVID-19 pandemic, the IRS has provided relief on that front, most recently in Notice 2020-39, 2020-26 IRB 1, released June 4. That notice gives investors whose 180-day investment deadline falls between April 1 and December 31 until the end of the year to make that investment.
Stamper observed that taxpayers have some flexibility when it comes to deciding when the 180-day window begins. For example, if the gains flowed through a partnership, investors have three options for deciding when to start the clock: They can use the date the transaction occurred at the entity level, the end of the partnership year, or the due date for the partnership return.
Investors also have options when it comes to section 1231 gain, Stamper said. The final Opportunity Zone regulations (T.D. 9889) only provide one option — the actual transaction date — but investors can opt to rely on the proposed regs (REG-120186-18), which use the end of the year, to stretch into the extended 180-day window, he said.
“The challenge here, relying on the proposed regs, is that you have to rely on them in full,” Stamper said. That means an investor may have to forfeit some options presented in the final regs that they would have otherwise wanted, he explained.
But Wait, There’s More
Gary Hecimovich of Deloitte Tax LLP observed that investors with section 1231 gains received additional relief when the IRS updated its Opportunity Zone FAQ.
In the update, the IRS addressed concerns that some taxpayers with section 1231 gains may want to operate under the general framework of the final regs but use the proposed reg’s gross section 1231 gain approach rather than the net gain approach in the final regs, Hecimovich said. In turn, the FAQ gave taxpayers the option not to use the section 1231 gain netting rules.
In doing so, the IRS effectively provided an extension for the 180-day rule that allows investors to begin tolling their 180-day window from December 31, 2019, Hecimovich said.
“When you combine that with this notice, it means that for your [section] 1231 gains in 2019, you have a much longer extended period. You actually have until [December 31, 2020] to roll over those gains,” Hecimovich said. That option “really opens up possibilities for those taxpayers that had 1231 gains in 2019 to have additional time to make investments in QOFs,” he said.