With just a few weeks left in the year, what are some last-minute strategies and options to keep in mind for Opportunity Zone investors?
Ashley Tison is an Opportunity Zone consultant and attorney based in Charlotte, North Carolina. Along with Jimmy Atkinson, he is co-founder of OZ Pros, an Opportunity Zone advisory firm.
Click the play button below to listen to my conversation with Ashley.
- Deadlines and extensions that apply at the investor level, Qualified Opportunity Fund (QOF) level, and Qualified Opportunity Zone Business (QOZB) level.
- Why a QOF may want to drop cash into a QOZB prior to the end of 2020, to take advantage of coronavirus relief.
- The 31-month working capital safe harbor business plan, and how IRS Notice 2020-39 allowed for a 24-month extension to grant safe harbor business plans of up to 55 months.
- How OZ Pros may be able to help you draft a working capital safe harbor business plan and help your QOZB take advantage of the 24-month coronavirus relief extension.
- Why we are expecting a big year-end rush to invest in Qualified Opportunity Funds, and why sooner is better than later.
- How gains recognized as early as January 1, 2019 may still be eligible for deferral into Qualified Opportunity Funds.
- Why stock market investors with huge gains since March may wish to consider investing in Opportunity Zones.
Featured on This Episode
Opportunity Zone Investment Deadlines
Capital Gain Recognized by Individual
- Capital Gain Event Prior to October 4, 2019: Your deadline to invest has already passed.
- Capital Gain Event Between October 4, 2019 and July 4, 2020: Your deadline is December 31, 2020.
- Capital Gain Event After July 4, 2020: Your deadline is 180 days after your recognition event.
Capital Gain Recognized Through a Partnership Schedule K-1
- Capital Gain Event in 2019: Your deadline is December 31, 2020. (Original due date of September 11, 2020, extended to year-end by IRS, due to coronavirus.)
- Capital Gain Event in 2020: Your deadline is September 11, 2021. (Partnership returns due date of March 15, 2021 + 180 days.)
Industry Spotlight: OZ Pros
Founded by Jimmy Atkinson and Ashley Tison, OZ Pros is an Opportunity Zone advisory firm that offers a simple document generation tool for quick and easy QOF and QOZB formation. OZ Pros also offers a customized done-for-you package as well and can assist with PPMs, subscription agreements, pitch decks, pro formas, business plans, and capital raising.
Learn more about OZ Pros:
- Visit OZPros.com
- Listen to the podcast to learn how you can get $50 off your OZ Strategy Call.
About the Opportunity Zones Podcast
Hosted by OpportunityDb.com founder Jimmy Atkinson, the Opportunity Zones Podcast features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in opportunity zones.
Jimmy: Welcome to the Opportunity Zones Podcast. I’m your host, Jimmy Atkinson. There are just a few weeks left in 2020, and a lot of you listening may be facing some year-end deadlines with regards to deferring into a qualified opportunity fund with your capital gains. Today, we will be discussing some options for executing an opportunity zone strategy in these waning days of 2020. And my guest today is my partner at OZ Pros, Ashley Tison. For those who don’t know, Ashley is an attorney based in Charlotte, North Carolina. Ashley, welcome back to the podcast.
Ashley: Thanks for having me, Jimmy. It’s always great to be on. Excited to talk today about some strategies that could help people out year-end and maybe even mitigate taxes as far back as January 1st of 2019.
Jimmy: That’s right. That’s a good point, especially if you had some capital gains recognized through a partnership that is very much in the cards. You could go all the way back to the beginning of 2019, almost a full two years ago. So, why don’t you get us started off here, Ashley, let’s see where this conversation goes today. Can you tell me what you’re seeing in terms of just the flurry of activity that’s coming your way over the last few weeks, and what do you anticipate your days will be like the last few weeks of the year here as more and more people come flowing across your desk with their opportunity zone ideas?
Ashley: Yeah. It’s been nuts. In a great way, it’s really great to see this program taking hold and people getting it, right? People finally understand and people are finally starting to click with them how powerful this incentive can be. And not just only on the deferral piece, which they’re starting to recognize is really a negative interest loan from the government if you’re invested prior to 2021, but also, you know, on that 10-year hold piece and some strategies that we can pack in around that about how you can actually use the money while you’re looking for a deal.
And so, that’s been most of the conversations that I’ve been having with folks is they’re like, “Okay, like how much time do I have in order to get a deal done?” Well, this end of year deadline that was extended by the IRS in Rev. Proc. 2020-39 not only allowed for, you know, any deadline that fell between April 1st and December 31st of this year to be extended to December 31st, but it also provided up to 24 additional months for, you know, anybody that has been affected by COVID to have a 55-month business plan or up to 55-month business plans if they were affected by COVID. And, you know, I don’t know anybody out there that hasn’t been affected by COVID just in their analysis of what they’re going to do business-wise and what their plan is going to be for how they’re going to invest money. And so, that’s been a lot of what we’ve been doing is putting together those 55-month business plans for folks that are, you know, dropping their money by the end of the year. It’s like, “Well, why not go ahead and drop it down into QOZB so that way you can participate in the 55-month business plan?”
Jimmy: And that just ends up buying them more time at the fund level.
Ashley: So, at the fund level, and so that’s kind of an interesting conundrum that I’m, kind of, walking people through because a lot of people have extended out until December 31st of this year to wait to drop their money into a fund, which if they do that, then their next asset test at the fund level where they have to have 90% of their assets in qualified opportunity zone property would be June 30th of next year. But some of the folks that have done that, even though they don’t have to drop it into a QOZB until June 30th of next year, they’re going ahead and electing to drop it into the QOZB because they have been affected by COVID. And, you know, what they’re going to do with that money has been, you know, adversely affected, and so they’re documenting that in those 55-month business plans, and they’re going ahead and getting involved in a business plan so that they can participate in that extended time that they’ll have at the QOZB level.
And so, it’s been an interesting, you know, couple of weeks of lots of conversations with folks and lots of strategy calls where we go over specifically that. And we’ve also been talking about what you can do with the money while you’re trying to find a project and, you know, effectively, how you can structure related-party loans in there so that that way you can put the money into the market, you can put the money into, you know, a compelling savings account. There’s lots of flexibility that with what you can do with the funds in the interim while you figure out what you’re going to do with your business plan during these 55 months. So, that’s been the lion’s share of what I’ve been talking with people about, Jimmy.
Jimmy: Interesting. So, there’s a few different deadlines that we’re referring to now, I think. I just wanted to clarify. We’re referring to one is a deadline at the investor level, which is the deadline for actually rolling over recognized capital gains into a qualified opportunity fund. And then when you’re talking about a 55-month business plan or a 24-month extension on the QOZB deal, that refers to the deadline for deploying capital within the fund after the gains have already been invested in the fund, is that correct?
Ashley: Yeah. And so, this is actually once you take the money from the fund and you drop it down into the QOZB, you’ve got…if you have either a 31 or a 55-month business plan, you have that amount of time to put that money to work in opportunity zone property to invest those dollars. And so, there’s two effective deadlines that we’re talking about. There’s first that deadline where you’ve got to get your money into a fund, but then the people that are dropping their money into a fund by the end of the year, particularly if it’s a self-directed fund, they may want to evaluate whether they just go ahead and put the money from the fund directly into a QOZB and also do that before the end of the year, so that way, they can harness the value of being in a working capital business plan safe harbor this year so they get the 24-month extension.
Jimmy: So, then there’s actually three deadlines if I can correct both of us. There’s the deadline for the investor, there’s the deadline for the fund to invest in the QOZB, but then there’s also the deadline or a window of time for the QOZB to deploy into opportunity zone property. Is that right?
Ashley: That’s correct. Sorry. And I’m probably…I talk about this stuff literally all day long for, you know, five days a week. And so, I know I throw out QOZBs and QOFs and deadlines. So, thank you for that clarification.
Jimmy: Absolutely. Oh, and for those who may be new when we’re referring to QOF, that stands for qualified opportunity fund and QOZB is typically the entity that sits directly below the QOF in the fund structure, and the QOZB stands for qualified opportunity zone business, just in case that was unclear for anyone.
Ashley: And just to reiterate on why we recommend kind of that double stack is specifically because by dropping the money into the QOZB down underneath the QOF, number one, you have a 70% asset test instead of a 90% asset test. And then number two, it gives you that either 31 or 55-month period of time to deploy that capital instead of having to meet an asset test every 6 months.
Jimmy: That makes sense. And what is the difference between the 31 and the 55-month?
Ashley: So, all qualified opportunity zone businesses can avail themselves of a 31-month working capital safe harbor if they have a written plan that they substantially follow about how they’re going to allocate their capital. And the Rev. Proc. 2020-39 allowed for an up to a 24-month extension for folks that were affected by COVID. And so, when I’m talking about the 31 or the 55, I’m talking about somebody that is in a working capital safe harbor business plan that has been affected by COVID and documents that affect in their working capital safe harbor business plan, and you can get up to an additional 24 months via that COVID extension.
And interestingly, you know, I mean, I don’t think that we’re through COVID yet, and so, it’ll be interesting to see if the IRS, which I really hope that they do, I hope that they come and, you know, they extend that out a little bit more because, you know, there’s lots of people that are still concerned about, “Okay, should I go into hospitality?” “Should I go into multifamily?” “Should I pump the brakes on that because of COVID?” And so, I think that, you know, having an additional time period, like they gave us already, would be very beneficial for purposes of, you know, making things happen and for allowing investors comfort that they’re gonna have plenty of time to deploy their capital.
Jimmy: Yeah, I hope you’re right. I hope so too. If the IRS can come and issue another relief notice at some point if not toward the end of this year, sometime next year maybe under the new administration, that would be very helpful I think. I wanted to back up for a minute and talk about the first deadline that we’re really talking about. And I think this is why we’re really having this episode today also is that you and I are both expecting, and I’ve talked about this on this podcast over, you know, a few episodes on the latter half of this year. We’re expecting a huge wave or rush of investors who are coming into qualified opportunity funds at the end of this year. And I think you’re already seeing a lot of that anecdotally, right, Ashley? And the reason for that is because of the 180-day investment deadlines that were all extended to December 31st, 2020 by that IRS relief notice 2020-39, which Ashley’s alluded to a few times, and I will link to that in the show notes for today’s episode at opportunitydb.com/podcast.
But effectively, what has happened is normally an investor who has recognized capital gain has a 180-day window to roll over that capital gain into a qualified opportunity fund. But the IRS said earlier this year…back in June, when they issued this relief notice, they said, “Well, nevermind the 180-day deadline. If your window falls in between a certain time period, we’re just extending that deadline out until December 31, 2020 is the cutoff point.” And effectively, it affects individuals who recognized a gain at any point between October 4th of 2019 and July 4th of 2020, that huge window of folks, and that includes people who participate in the stock market sell-off at the end of February and beginning of March this year. Their deadlines, they don’t have 180-day window. They all have exact same deadline of December 31, 2020. So, that’s why Ashley and I are expecting a big year-end rush. And I think we’re already starting to see the tip of the iceberg on that. If you recognized gain after July 4th, then you do just have the 180-day window apply, but that takes you out into 2021 then anyway.
Secondly, if you recognized gain through a partnership schedule K1, you actually have until the end of this year if you recognized any gain through that partnership schedule K1 at any point during 2019 just because of the way that the regulations are written and the different timing there. I won’t get into the weeds too much, but you could really have had a capital gain recognition event on as early as January 1st, 2019 through a partnership and still have until the end of this year to roll it over into a qualified opportunity fund. Ashley, did I get all that right, first of all? And second of all, do you have anything else to add to that?
Ashley: No, you got it perfect, Jimmy. And, you know, I think that as a result, that’s one of the reasons why we’re seeing, you know, a number of people that are now, you know, hearing about opportunity zones and they’re realizing, “Wow, you know, I could go all the way back into 2019.” And so, I’ve helped a number of people who’ve actually gone back and amended to roll over that gain and actually put it into a deal specifically because of that.
Interestingly enough, I’ve also had a number of conversations with people that have pent-up gains that got into the market, you know, after the big sell-off because of the COVID. They got into the market at that point in time, and now they have, you know, these massive pent-up gains that they’re looking at before the end of this year. And they’re actually looking at selling those off in and then rolling those over mainly because they wouldn’t have held for a year and so it would be short-term. And so, it becomes an issue of postponing ordinary income as well. And it’s been interesting to hear people and to, kind of walk, through the reasoning and the analysis, and obviously, a lot of times that’s personal. But the great news about that is that the program is accomplishing what the drafters of the legislation wanted to have happen, which is that they wanted to get people who had pent-up gains in the stock market to evaluate, to look long and hard at those to say, “Hey, maybe now’s the time to sell and to put this into other stuff.”
Jimmy: Yeah, that’s a great point. Especially since, I mean, in that last example you mentioned, there’s been a huge stock market run-up over the last, what, seven or eight months or so here since it bottomed out, what was that, early or mid-March. You know, a lot of people do have those pent-up unrecognized capital gains, maybe they see that they’re a little bit heavy in stocks right now. It might be a good time. I don’t mean to be giving anybody investment advice, but your stock market portfolio, it’s probably a lot higher than it was seven months ago. Maybe you take a little bit off the table and deploy it into qualified opportunity funds. I think you’re seeing a lot of people come to you with that very idea, right?
Ashley: Exactly, right. So, Jimmy, I think one of the other things that is really important to hit is that if you’re thinking about or remotely thinking about trying to get something done before the end of the year, the time is now to take action on that because with holidays…and last year, the Internal Revenue Service website for generating employer identification numbers was down from like Christmas all the way through New Year’s. And so, it made it very difficult to get an EIN. And then, you know, if you are going to look at setting up your own QOF-QOZB combination, which we do all day every day at OZ Pros, the next step of that is that you actually have to create a bank account and you have to fund the bank account into the QOF. And then if you want to avail yourself of that kind of working capital safe harbor extension, you’re then gonna have to fund it into the QOZB. And so, that stuff just takes time. And so, we have a limited amount of time left. So, I guess that’s what would be my, kind of, final parting shot is to get it done.
Jimmy: Good. So, the deadline is December 31 for a lot of people, but in particular, if you’re going to be setting up your own self-directed qualified opportunity fund, you can’t wait until the afternoon of the 31st to start getting this figured out. You need a few days of lead time to get your employer identification number for the QOF and the QOZB, and you also need to open up some bank accounts. So, give yourself a few days, try to get it done, or try to get the ball rolling on it before Christmas if you can.
Ashley: And then if you’re after Christmas, we’ve got some funds that we’re working with, Jimmy, that I’m sure would be more than happy to accept your dollars, but even on an investment like that, you know, it takes time to close those deals. And so, you want to start your due diligence as soon as you can, go ahead and start having conversations with those sponsors, and go ahead and start moving money and getting money deployed into the opportunity zones because, you know, there’s no time like the present and particularly as we’re, kind of, running into this end-of-year deadline.
Jimmy: Yeah. That’s a great point, Ashley. For a lot of you, you may be interested in simply just rolling over your capital gains into a third-party qualified opportunity Fund where your hands can be…you can be more hands-off. But yeah, even a lot of them, I’ve noticed just anecdotally, a few of them have close dates of December 30th because I just think they don’t want to have people rush to them on the 31st. You know, I heard a story about a fund issuer last year who was trying to get in a wire from one of their investors on the afternoon of the 31st, and it just causes everybody to panic a little bit, just making sure that that money goes through all right last minute. So, yeah, don’t wait until the last minute if you can avoid it. If you can get it in after Christmas but well before the 31st, that would be helpful.
Hey, Ashley, thanks for joining me today. It’s been a pleasure speaking with you as always and great insights as always. Before we go, can you tell our listeners where they can go to learn more about you and OZ Pros?
Ashley: Well, thanks, Jimmy. You can go to www.ozpros.com in order to set up a strategy call. And if you go to www.ozpros.com/podcast, you’re going to get a discount code and you’re going to have a savings on that strategy call. We’ve also got a special promotion where we’re doing business plans for somebody that wants to avail themselves of those. And we’d be happy to facilitate either a strategy call, a business plan, a complete package, and get folks set up and rocking and rolling if they want to do their own. Or just to have a strategy call and to talk through the deadlines and to talk through investment strategies or anything else that you want to talk opportunity zones on a strategy call. We look forward to hearing from everybody and look forward to working with you on the go forward.
Jimmy: Perfect, thanks, Ashley. And for our listeners out there today, I will have show notes on the Opportunity Zones Database website. You can find those show notes at opportunitydb.com/podcast, and there you’ll find links to all of the resources that Ashley and I discussed on today’s show. I’ll be sure to have a breakdown of all of the different deadlines, as well as a link to IRS notice 2020-39. And, of course, please do head over to ozpros.com/podcast to save on your strategy call with Ashley Tison. Ashley, thanks for joining me today. It’s been a pleasure.
Ashley: You as well, Jimmy. Take care.