Why is 2021 expected to be a big year for Opportunity Zones and what are some of the key deadlines that investors and fund issuers should be aware of?
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.
- The five different relief extensions granted by IRS Notice 2021-10:
- 180-Day Investment Requirement
- 30-Month Substantial Improvement Period for QOFs and QOZBs
- 90-Percent Investment Standard for QOFs
- Working Capital Safe Harbor for QOFs
- 12-Month Reinvestment Period for QOFs
- The importance of documenting reasonable cause should your Qualified Opportunity Fund fail to meet any compliance criteria or deadlines.
- Crucial deadlines that are hitting in 2021 (see “Key Dates in 2021” below.)
- The importance of taking action on these deadlines as soon as you can, and not waiting until the last minute.
- The types of Opportunity Zone stakeholders that may be able to gain value from an Opportunity Zone strategy call with Ashley Tison at OZ Pros, including fund issuers, deal sponsors, business owners, investors, impact-oriented individuals or organizations, economic development entities, and local municipalities, to name a few.
Featured on This Episode
Key Dates in 2021
- March 31, 2021: Deadline to invest any gains recognized by an individual taxpayer from October 4, 2019 through October 2, 2020. This is also the deadline to invest any 2019 gains recognized through a passthrough entity (partnership or S-Corp) Schedule K-1, going back as early as January 1, 2019. We are expecting a flurry of investment into Qualified Opportunity Funds as this date approaches.
- June 30, 2021: The date of the first twice-annual asset test for Qualified Opportunity Zone Businesses and Qualified Opportunity Funds. We are expecting a flurry of Opportunity Zone deal transactions as this date approaches.
- September 11, 2021: The deadline to invest any 2020 gains recognized through a passthrough entity (partnership or S-corp) Schedule K-1, going back as early as January 1, 2020. We are expecting a flurry of investment into Qualified Opportunity Funds as this date approaches.
- December 31, 2021: The date of the second twice-annual asset test for Qualified Opportunity Zone Businesses and Qualified Opportunity Funds. We are expecting a flurry of Opportunity Zone deal transactions as this date approaches.
- December 31, 2021: The final date for investors to place capital into a Qualified Opportunity Fund and be eligible for the 10-percent basis step-up, which grants the taxpayer a 10 percent reduction in the amount of capital gains recognition on the original capital gains. We are expecting a flurry of investment into Qualified Opportunity Funds as this date approaches.
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 October 2, 2020: Your deadline is March 31, 2021.
- Capital Gain Event After October 2, 2020: Your deadline is 180 days after your recognition event.
Capital Gain Recognized Through a Passthrough Entity Schedule K-1
- Capital Gain Event in 2019: Your deadline is March 31, 2021. (Original due date of September 11, 2020, extended to March 31, 2021 by IRS Notice 2021-10.)
- Capital Gain Event in 2020: Your deadline is September 11, 2021. (Partnership returns due date of March 15, 2021 + 180 days.)
- Capital Gain Event in 2021: Your deadline is September 11, 2022. (Partnership returns due date of March 15, 2021 + 180 days.) However, in order to be eligible for the 10-percent basis step-up, your capital needs to be invested in a Qualified Opportunity Fund by December 31, 2021.
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 schedule an Opportunity Zone Strategy Call with Ashley Tison at a discounted rate.
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. 2021 is expected to be a big year for Opportunity Zones. We’ll explain why throughout the course of today’s episode and also key in on some crucial 2021 deadlines that investors and qualified opportunity fund managers need to be aware of. We’ll also dive into the recently-issued IRS Notice 2021-10, which extended some of this year’s key deadlines. Joining me today to discuss this topic is my partner at OZ Pros, Ashley Tyson. Ashley joins us from his home office in Charlotte, North Carolina. Ashley, welcome back to the podcast.
Ashley: Jimmy, it’s great to be here as always. I tell you what, Jimmy, I can’t tell you how stoked I am to be in 2021 and with all of the things that are going to happen this year within Opportunity Zones, but then, you know, on top of that, we get this extra goodie from the IRS. So, I can’t tell you how fired up I am to be able to talk with you about that today and to unpack that and, you know, to strategize with you on here so that we can lay the foundation for strategizing for all of our listeners and for all of our clients about what this means for them and how 2021 is going to be a rocking year for anybody that’s involved in Opportunity Zones.
Jimmy: Yeah. Awesome. Well said Ashley and that little goodie that you’re referring to is, of course, Notice 2021-10, which was issued by the IRS late in the evening on January 19th during Trump’s final full day in office. This notice extended five different deadlines, granting additional relief for qualified opportunity funds and for investors in those funds. Those funds and investors affected by the ongoing novel coronavirus pandemic was the reason for this extra relief. Perhaps most notably, Ashley, it extended the 180-day investment period for many investors to March 31, 2021. And Opportunity Zone participants who have been following for a while may remember that the IRS issued a relief notice last year that extended a lot of investors’ deadlines or 180-day windows to year-end 2020. Essentially, what this does is it punts the ball even further down the field now to March 31, 2021.
So, Ashley first, I want to go through each one of the five different relief extensions granted by this notice. I’m going to list them off one by one first, then we’ll tackle each one, but number one is the 180-day investment requirement for QOF investors, which I just mentioned. Number two is there is relief for the 30 months substantial improvement period both for qualified opportunity funds and for qualified opportunity zone businesses. Number three is the 90% investment standard for QOFs. There was some relief granted there. Number four, some relief granted for the working capital safe harbor for qualified opportunities owned businesses. And finally, we’ll talk about point number five, which is the 12-month reinvestment period for qualified opportunity funds. So, circling back to point one, Ashley, I’ll turn to you. Can you explain to us in more detail now what is happening with the relief that was granted for the 180-day investment requirement for QOF investors extending that deadline out to March 31, 2021?
Ashley: Yeah. So, basically, you know, at the end of last year, you know, we were in, kind of, a mad scramble to get everybody in on that December 31st deadline because, you know, we wanted to take advantage of being able to go basically all the way back out to, you know, for people that had even the sale of stock or a direct, you know, gain that they needed to get in within 180 days. We were able to go back all the way to October 4th of 2019 in order to be able to grab that. And so, this additional, you know, extension of time allows us to be able to, you know, to do a similar thing to where we’re postponing that, you know, were effectively the folks that got in by the end of the year. You know, that’s great and we’re certainly stoked that they did, but this extends that opportunity now till March 31st as well.
And so, you know, I think that once again, it allows people to say, you know, maybe that they were, kind of, sucked in by the year-end stuff that everybody always has to deal with and they couldn’t tend to this now to be able to look at it and to say, “Okay, when did I have gains and when are those gains. You know, how far back can I go on those gains until where they will be eligible for, you know, putting them into a qualified opportunity fund and being able to defer the taxes on those?” And, you know, it’s not just deferring the taxes and I keep talking to people about this. It’s not only deferring the taxes, but it’s also during this year, being able to get that 10% reduction when you pay the taxes in 2026, also opening the door to get creative about some other mitigation strategies that you can do along the way leading up to 2026, you know, with some cool charitable gift and ideas and some other impact-focused ideas. And I think we’re also going to see some climate focus things that you’ll be able to do that’ll have some cool tax benefits as well, that it opens the door again for people to say, “Okay, you know, I wasn’t able to get to this because of end-of-year, or corona, or whatever it was, but now I’m taking a look at it again.” And so, it’s really neat to be able to see that the IRS did that for folks and once again, to, you know, this duty that they dropped in our laps.
Jimmy: Absolutely. And just to round out that point, I’m going to very explicitly explain who this new deadline applies to. So, it applies at both the individual taxpayer level and for people who recognize a gain through a partnership Schedule K-1. So, we’ll go through each of those scenarios and then we’ll move on to point number two. But just to round this out, the March 31, 2021 deadline is now the deadline to invest any capital gains recognized by an individual starting from October 4, 2019 through October 2, 2020. Now, beyond that October 2, 2020 date, just the normal 180-day window would apply because that ends up taking you out beyond March 31, 2021. So, if you’re an individual again, and as Ashley mentioned a minute ago and as I just mentioned, you can go back to October 4th. Now, if you recognized a gain through a partnership Schedule K-1, you can actually use the March 31, 2021 date as your new deadline to invest any gain recognized at any point during the 2019 year. So, you can technically go back as far as January 1, 2019, as long as that gain was recognized through a partnership Schedule K-1.
And the reason for that is you can elect to use the due date of the partnership tax return, which is March 15th of 2020, as the beginning of the 180-day period. And that end of that 180-day period ends up dropping you in that window between October 4, 2019 and October 2, 2020. So, you can actually go all the way back as far as January 1, 2019. I just dropped a bunch of dates in your lap there. If you want to see these dates in text form and formatted a little bit more nicely and a little more clearly, check out the show notes for today’s episode. You can find those at opportunitydb.com/podcast, but suffice it to say this number one point, and we’ve dwelled on this number one point for a while because Ashley and I both agree it’s the most important one, but let’s continue to go through the other four points here, Ashley.
Ashley: It’s not just partnerships, but it’s also S corporations. So, anybody that gets a K-1, if you had a gain that showed on your K-1 all the way back to January 1, 2019, we can still defer that. And, you know, the beautiful thing about that is it’s a fairly simple process to… You’ll have to amend your return, obviously, because you’re going back and more than likely, you’ve probably already filed your 2019 return, but we can, you know, walk you through, we could walk your accounting team through the process on that, but it’s unbelievable that that applies to both partnerships and S-corps.
Jimmy: Yeah. Good point, Ashley. And yeah, it will be a little bit of a headache potentially to modify those 2019 returns, but if your gain is large enough it could definitely be worth your while and Ashley’s here to help you out with that. We’ll tell you about how to get on a strategy call with him later in the episode today.
Ashley: It’s also not only if your gain was large enough, but if whatever you’re investing into is going to have significant enough upside potential and you had a capital gain that you want to use as the equity for that, that’s also another thing that I consistently talk with people about is to say, “You know, really focus on the entire benefit of this program and obviously, the deferral and the reduction are great. The biggest benefit is that step up in basis to fair market value. But in order to get that, you have to start with a capital gain.” And so, if we can go back all the way to 2019 and grab some of that gain, even if it’s a small gain, it might be worth it in order to be able to have that be the equity that goes into that Opportunity Zone deal that’s going to really, really ton it and come back to you with a step up in basis to fair market value.
Jimmy: Excellent point. Excellent point. So, let’s go through the remaining four relief extensions that were granted by this IRS Notice 2021-10. So, the point number two, Ashley, is the 30-month substantial improvement period both for QOFs and QOZBs. Can you walk us through that a little bit?
Ashley: Yeah. So, it’s really interesting because I think that, you know, there’s this whole thing and I actually get tied up on it all the time. I mistakenly say 31 months as we’re talking about this. And I think I’ve done that a couple of times even with you, Jimmy. And there’s a difference between that 31-month working capital safe harbor and the 30-month time period to substantially improve the property. So, if you don’t have new use, if it’s not original use in the zone, you’re going to have to substantially improve the property. And this could be on property that’s been acquired after December 31st of 2017. So, any property that was acquired from 2018 on, you could effectively treat it as qualified opportunity zone business property and you could elect to make the substantial improvement. And the really interesting part about that is that you get to choose when you want that 30-month period to start because the regs specifically say that it’s during any 30-month period that you have to substantially improve it.
And so, what this did is for anybody that, you know, that is in the process of substantially improving it’s great because it automatically tolls it, right? And so, you effectively could get up to 42 months now because you’ve got that 30 months plus this additional 12 months. And then for anybody that has not begun to substantially improve it, now what they probably need to do is to look at that and to say, “Okay, when do I want this to start relative to when do I want to select it to start?” And the reason I say that is because when you pick that 30-month period, you’re starting at what the basis is at the beginning of that 30-month period. And so, if you do stuff along the way, so, like, let’s say that you have a property that’s going to have a of construction later on but you’re doing little things along the way to it in order to, you know, make it tenantable or whatever it is, each time you do that little thing, that’s going to increase the basis that you’ll ultimately have to double when you choose to have your 30-month period start.
And so this could be something, and this is one of the things that I regularly talk to people about on the strategy calls is let’s really unpack your situation. Let’s look at when you started it, or when you’re going to start it. And let’s look at all of the details of that to really, kind of, get into the weeds of, “Okay, does this make sense to do now or to do later, or what does that look like in the context of their individual project?” But once again, a nugget from the IRS that it gives us more flexibility to be able to deal with that, particularly because of COVID and the implications relative to being able to start that process and it effectively extends it out, which is great.
Jimmy: Yep. Another nugget, and a little bit more relief, a little more flexibility. Absolutely. Point number three in the relief notice, Ashley, is some relief that was granted for the 90% investment standard or also known as the 90% asset test for qualified opportunity funds. Walk us through that one, please.
Ashley: So, Jimmy effectively, what they did is they extended that deadline. So, we had another extension, right? There was the COVID extension and that was 2020-39. And that extended people’s asset tests from, you know, it effectively gave them a gimme for the June 30th, 2020 asset tests and it pushed everybody until December 31, 2020. So, effectively, what they’ve done is they’ve extended that 2020-39 extension out again. So, it was December 30th of 2020. Now, it is June 30th of 2021. So, once again, they gave us another, kind of, pass on that 90% test. So, and if you got in before the deadline, right, so, there was a lot of folks that I was talking to we were talking about, “Hey, let’s go ahead and drop the cash down into…” and quite frankly, it was really beneficial because we were able to solve some issues where they had missed their June 30th asset test.
And now, we got to be able to drop their money down into a QOZB to be able to hit the 90% test on December 30th. And we’re going to talk about how it’s actually okay because they got an extension as well, but anybody that missed that test again on December 31st, now, they have another chance to make that better. So, anybody that missed that test on December 31st, now they have another chance to hit it June 30th of 2021. So, you know, once again, I think that all of these deadlines, you know, caused, kind of, a flurry of activity and have a great benefit for people who were playing in the zone because it provides not only an opportunity but it, kind of, forces people to say, “Okay, where am I going to deploy my cash? What am I going to do with it?” And so, there then becomes opportunities for funds to be able to take investor dollars in and it generates interest level in that, kind of, thing for people that are inside of the opportunity zone space. So, once again, right, kudos to the IRS.
Jimmy: Yeah. Now, actually, is that relief granted automatically, or would you recommend that the QOF document some, sort of, a reasonable, cause some sort of effort was made, but they failed the 90% asset test of the previous period due to some sort of reasonable causes?
Ashley: So, Jimmy, I’m always of the position that if you’ve got reasonable cause and you’ve got a story relative to why something happened, always document that. And that’s the whole name of this game, document, document, document. You know, you don’t have to ask for permission, but you better have your documents in order if it comes down to where you’ve got to prove this stance that you took. That’s why we say that it’s all about the audit trail. And so, if you have the ability to be able to document that, that’s great.
Now, on the flip side of that, it says right here, as I’m reading this, “This relief is granted under Section 1400 Z-243 and is automatic.” QOFs do not have to call the IRS or send letters or other documents to the IRS to receive this relief.
Jimmy: Good. That’s good to point out, but you would still recommend, “Hey, if the IRS ever comes calling you years down the road and they’re doing an audit on your QOF, wouldn’t hurt to have a little bit of documentation as to why you failed that test, right?”
Ashley: That’s just it. It doesn’t hurt to have documentation with respect to any of this stuff that we’re talking about, Jimmy and, you know, and it’s not difficult, right? It’s called a contemporaneous documentation, right? So, it’s like, you’re basically taking notes literally. It’s almost like you’re taking notes in class and you’re telling the story in the file about what happened. And I think that that’s always good to have. But to that end, I mean, I think that you also, I mean, you’ve got this one automatic. So, if, you know, for whatever reason, you know, you missed it because the dog ate your homework, you know, rely on the automatic relief.
Jimmy: Good to know. Well, let’s move on to point number four. Then, we’ve got two more to cover here in this relief notice. Number four is the relief granted for the working capital safe harbor for a qualified opportunity zone businesses or QOZBs.
Ashley: Yeah. So, this goes to my point about the folks that, kind of, scrambled towards the end of last year, right, to get their money into a drop-down, into a QOZB before December 31st. Once again, we’ve got it extended out till June 30th of this year. They extended that deadline out to June 30th to where you can drop it down into yourQOZB now, but they’ve also, you know, they’ve delineated that on the working capital safe harbor, you know, for an opportunity zone business that if you are… And this gets into a tricky conversation and a debate that is, kind of, going back and forth inside of the opportunity zone community about whether you actually need to have documented cause as to why you should be eligible for up to an additional 24 months or whether it’s automatic. And certainly, this language that came out in this update certainly seems to imply that that, you know, it’s an automatic 24 months if you’re in a federally-declared disaster area, which the entire United States was because it’s been declared a disaster area because of COVID.
And so, you know, this then spells out as well that if you are in under a 31-month plan, that you have 55 months now, and that if you are under a 62-month plan, you now have 86 months. And so, here’s the thing is that you have to be inside of a plan by June 30th of this year. And so, you know, once again, and now it makes, you know, to where, you know, people should really evaluate that relative to if they’ve got a QOF and they’re funding a QOF. And, you know, typically, if they’re going to fund that QOF during any time between now and June 30th of this year, they’ve got all the way till December 31st to drop that money down into a QOZB. But it may make sense to look at going ahead and dropping that money into a QOZB to get it covered because you’re going to get an additional 24 months, particularly, you know, if you’ve got a reason as to why. And this is particularly the case and I like to go, kind of, belt and suspenders on everything that I do and I recommend for my clients to do the same is that if you have a reason, absolutely take the 24 months.
So, you know, so then we’ve had conversations as well with folks that, you know, that could be because you’re really trying to figure out whether you’re going to go into a certain asset class. You’re trying to figure out what the impact of COVID’s going to have on the hospitality business, on multifamily, on office, on retail, on a litany of different issues that could be affecting why you need that additional time in order to be able to invest your money. And so, once again, document, document, document those reasons. And that’s one of the things that we worked through a lot on strategy calls is are those specific reasons and how you go about putting that into, you know, this 31/55/62/86 month business plan. And so, you know, once again, I love that they extended it out again, and it’s good news for anybody that’s in a working capital safe harbor business plan.
Jimmy: Agreed, agreed 100%. But yeah, a lot to talk through, a lot to get figured out when you talk to these clients that call you up, Ashley. I understand that completely. Let’s hit the fifth and final point that was covered by Notice 2021-10, which was released just a few days ago. It’s relief granted for the 12-month reinvestment period for QOFs. Can you walk us through that one?
Ashley: Yeah. So, you know, if a fund gets a distribution back, so, if it has a capital event or if money comes back to it in the context of a return of capital, that fund then has 12 months to reinvest that cash into qualified opportunity zone property. And so the 2020-39 extended it out for a maximum re-investment period of not more than 24 months total, right? And so, this now extends it out to June 30th of 2020, right? So, we basically got another six months, I guess, effectively on that if you will, right? We got till June 30th.
Jimmy: So if any qualified opportunity funds 12-month re-investment period includes that June 30th, 2020 date, that fund receives up to an additional or actually I think it’s worded not more than an additional 12 months to reinvest. So, it potentially would take you out toward the end of June of 2021.
Ashley: I don’t know of a whole lot of people that have money coming back into their QOF that didn’t drop it back down into something, but if you did, I mean, this is great news for somebody that for whatever reason wasn’t able to get that cash back deployed. And so, it effectively makes it so that you’re not going to now blow that 90% test. And, you know, that could be good news for some folks that had some, kind of, capital event or something that came back up into their QOF. Now, as I’m saying that I can’t imagine that, you know, anybody that had money coming back into the QOF wouldn’t have gotten it redeployed again is that one of the things that can, kind of, be a footfall for people that they need to pay attention to is just cash, right, cash that they have that’s bouncing around inside of their account and how that cash is treated, whether it’s a return of capital, or income, or that, kind of, thing. To the extent that it’s a return of capital or it can be treated as a return of capital, then they ought to be looking at this and they ought to be looking at if there’s a possibility that maybe they could go back and grab this and utilize that as an extension to be able to get it dropped back down into qualified opportunity zone property so they don’t blow that 90% test.
Jimmy: Makes sense. Makes sense. That’s a tricky one, but these are the types of issues that you walk through with clients on those strategy calls you do. So, that’s great. So, Ashley, we’ve pretty much walked the entire Notice 2021-10 and I will link to the actual notice if you want to read the language from the IRS yourself. That’ll be available on the show notes page for today’s episode, which again, you can find at opportunitydb.com/podcast.
Ashley: And I would actually go and read that because it’s actually really well-written. And Kyle Griffin is the IRS, you know, worker that wrote it. And he did a great job of in fairly plain English, you know, as plain English as you can when you’re drafting one of these regs, he did a great job of dialing in what the extension is and what people are entitled to. So, once again, just another kudos to the IRS. You got to hand it to them. They did a great job on this one.
Jimmy: And it’s only 10 pages. So, if you’ve got a few minutes, you can read through the whole thing. Okay. So, Ashley, let’s now walk through… In the last few minutes of today’s episode, I want to walk through the crucial deadlines that are hitting this year in 2021. And we’ll go through these in chronological order. So, starting with March 31, 2021. That’s a date that we keep hitting on this episode over and over again. I’ll just briefly recap it for you. Again, this was point one from the relief notice. March 31, 2021 is now the deadline to invest any gains recognized from October 4, 2019 through October 2, 2020. And again, beyond that October 2, 2020 date, simply the 180-day window would apply. And that takes you out into April of 2021 and beyond. So, that’s pretty simple. Another key date again is March 31, 2021. And that’s the deadline to invest any 2019 gains recognized through a partnership or an S-corp Schedule K-1 potentially going as far back as January 1, 2019. Ashley, anything to add there, or do we got it?
Ashley: No, I think that gets it and that sums it up, other than look at your gains and look at what your ultimate benefit is, and then we can do the cost-benefit analysis about whether it makes sense to fool with amending.
Jimmy: Good point. Good point. The second key deadline that’s coming up in 2021 that Ashley and I have identified is June 30, 2021 because that’s when the first asset test is due, or not due but conducted. Is that correct, Ashley? Maybe you can briefly add some thoughts there.
Ashley: Yeah, correct. So, for everybody that, you know, that dropped their cash in by December 31st of last year, well, their first asset test was December 31st, but they get a gimme because the cash, you know, presumably it’s sitting in cash still on that first asset test, then the next asset test becomes June 30th of 2021. And so, they now have to drop that cash down into a qualified opportunity zone business or a qualified opportunity zone property. So, it’s a significant date for funds and for people that set up their own funds in order to be able to defer, which we did a ton of at the end of last year because they didn’t necessarily know exactly what they were going to do, or they had an idea about some stuff that they wanted to do in an opportunity zone, but they wanted to preserve the deferral on as much of their capital gain as they could. And so with the idea that, “Hey, during this first six months, I’m going to try and look for other deals out there that I can invest into.”
So, one of the things that I think is really and that I’d love to hear about and we’d love to have a strategy call with you if you are a fund that’s looking for capital and you can accommodate investments into your qualified opportunity zone business, set up a strategy call with us because we’ve got folks that have money that is, you know, that they’re looking to deploy, you know, specifically into deals like that. And if you’re not or if you’re don’t have that kind of as your business plan, you ought to really look at doing that and being able to accommodate investments directly into your QOZB from other established funds, even if it’s not big funds, but it’s little funds that got set up because they didn’t know about you at the time. And this allows you to, kind of, get more of…to be able to go back in time, if you will, to grab some of that deferred cash.
In addition to the QOFs having to deploy their cash into qualified opportunity zone property, qualified opportunity zone businesses need to make an assessment and they need to do their asset tests on the June 30th as well. To the extent that they have qualified opportunity fund money, they’re ultimately going to need to report to that qualified opportunity fund what the value of, you know, the business investment itself was as of the six-month mark. And then they’re also going to need to be able to give the qualified opportunity fund the value of their own property and the value of their leased property. So on Form 8996, each fund has to delineate this for each qualified opportunity zone business that it’s invested in. And so, go ahead and set that and so, you know, qualified opportunity zone businesses as they’re thinking about this should go ahead and lock and load that and get that valuation done as of June 30th so that they can be prepared to be able to give that information to their qualified opportunity fund and/or their fund investors so that they can have the information to file a Form 8996.
Jimmy: Well stated, Ashley. Thanks for adding some color there. So, we’re expecting a flurry of investment activity into qualified opportunity funds, you know, mid to late March. We think there’s going to be a flurry of activity there. Likewise, we’re expecting a flurry of deal transactions to be taking place as we get closer and closer to that key asset test deadline of June 30th of this year. The next date on the calendar that sticks out at Ashley and me is September 11, 2021. And the reason for that is that is the deadline to invest any 2020 capital gains recognized through a partnership or S-corp Schedule K-1 going as far back as January 1, 2020. And the reason for that is if you recognize a gain through a Schedule K-1, you can elect the March 15th of the following year due date for the partnership or S-corp returns. That due date is March 15th of 2021. Add 180 days to that and you arrive at the September 11, 2021 date, and that’s your deadline to actually drop those gains into a qualified opportunity fund. Did I get that right, Ashley? Do you have anything else to add?
Ashley: Yeah, but just be wary that it is September 11th. So, 180 days from March 15th is September 11th because you can’t just count, like, on your fingers six months out from March 15th and say September 15th. I think a lot of people, kind of, just naturally do that in your mind. I know I certainly do when you’re ball-parking, but this is 180 days and it’s specific. So, it’s important that they have that done.
Jimmy: Yep. A great point there, Ashley. A great point there. The final key date this year is the final date of the year. It’s December 31, 2021, and it’s a key date for two reasons. One, you have another asset test deadline there. So, very similar to the June 30th date in that regard. We would expect a flurry of deal transactions in opportunity zones to be taking place the last several weeks of the year leading up to that year-end cutoff date. But perhaps more importantly, it’s a very key date in the opportunity zone statute because December 31, 2021, is effectively the last date to place money into a qualified opportunity fund as an investor and be eligible for the 10% step up in basis, which essentially grants that taxpayer a 10% reduction in the amount of capital gain that is recognized on the original gain. The reason for that is you are required to have a five-year holding period in order to take advantage of this 10% basis step-up tax benefit, but your five-year hold needs to be achieved by December 31, 2026. So, subtract five years from that date and you arrive at the December 31, 2021 deadline.
So, with the last date to actually get that 10% basis step up, we think that there’s going to be a flurry of investment activity, you know, the last several weeks or really the last couple of months of the year, right, Ashley, as that tax benefit goes away forever, barring some, sort of, congressional action to extend it. Is that correct? Do you have anything else to add there, Ashley?
Ashley: No, you’re absolutely correct, Jimmy. And, you know, to the extent that you are anticipating that you have a year-end deadline, you know, you really ought to start working on, you know, your plans on that at the beginning of the fourth quarter. And so, in your mind make Halloween your deadline, right, or list Halloween your deadline to have everything, kind of, lined up for, to be able to place, you know, your money into deals. And so, if you’re looking for qualified opportunity zone property, you know, really try to have, you know, by Halloween that you know where it’s going to go, or if you’re looking to do a deal, it’s like Halloween, let’s get it done. And then if you have Halloween in your mind, you know, more than likely, you’re going to bleed into November and then Thanksgiving happens. And then, you know, you’re going to be scrambling, kind of, the first week of December, but, you know, invariably things, you know, get pushed and they get pushed towards the end of the year. So, to the extent that you can be intentional about that, to get the wheels in motion ahead of time, that’s going to be hugely advantageous to beat the rush. And I can count on there being a rush.
You know, one of the things that the IRS does do and they’ve done it the last two years, so, in 2019, when I had a bunch of people scrambling, you know, to get funds set up, to be able to get their cash in to be able to get this, the website for getting employer identification numbers went down on I think December 27th. They took it down for maintenance. And then this year, it went down on December 23rd. And so, you know, once again, it makes it very difficult to be able to get something done prior to the end of the year. Now, we’ve set up some, you know, some funds that people can effectively purchase, right, so that, that way, they have an EIN and they’re ready to go for people as part of one of the packages that we have, and we’ll have some of those for the end of the year, but once again, just in your mind’s eye, keep that Halloween deadline in place.
Jimmy: Right. And Ashley, a moment ago, I referred to the December 31, 2026 sunset date in the opportunity zone statute, which effectively means that the ability to achieve the 10% basis step up on the original gain expires at the end of this year on December 31, 2021, unless there’s some sort of legislative action that extends the opportunity zone initiative. What are your thoughts there on potentially getting this initiative extended?
Ashley: So, Jimmy talking about potential extension of the legislation, so, we’ve seen the IRS give us two extensions of deadlines, you know, both with the recent revenue procedure rulings that they’ve they’ve sent out. And I don’t think that we can count on that again. And that’s the beauty of when they timed these things coming out. So, once again, I got to hand it to them that they timed it after the deadline. So, it got people to move on the deadline. And then to the extent that people were unable to move on the deadline, now, it gives them a window to do it again. But I think that whether it’s the IRS or whether it’s legislation if legislation comes out, the smart legislation is going to come out after this 2021 deadline. What I’d love to see you and I think what a number of other people in the business would love to see is that everything effectively gets extended out two years because of COVID, because of how long it took us to, kind of, understand the program, that kind of thing.
And if that were the case, then people that came in during 2021 on that 2021 deadline would now be able to get that 15% reduction. So they wouldn’t get penalized, firstly, for getting it done, but then it would also open the window up for another two years to be able to get that 10% reduction. So, you know, we can, you know, paint our picture of what we… You know, we can ask Santa Claus for what we want. And then, you know, we got to deal with what we ultimately get, but in my world, that’s what I want Santa to bring me for Christmas this year or actually not for Christmas. I want him to bring it to me as a new year’s gift in 2022.
Jimmy: Yeah. That would be phenomenal. That’s definitely on our wishlist for Congress to take action like that if they could extend the opportunity zone end date of December 31, 2026 out into December 31, 2028, or possibly even beyond that. I mean, the more the merrier there. We would absolutely love to see that. I don’t know if that’s going to happen or not. I don’t think we can count on it, but it is definitely something that’s on our wishlist. And just to be clear, that December 31, 2026 date is written in the statute. It is written in the law. It is very explicitly defined as December 31, 2026. And as such, the IRS doesn’t really have the authority to amend that date. So, it would take an act of Congress in order to extend that deadline further out. Well, Ashley, it’s been a pleasure speaking with you as always.
Before we go, let me tell our listeners what we’ve done for them. A lot of them may have questions, or a lot of them may have some opportunities on strategies that they would like to discuss with you further. For listeners of this podcast, we’re going to give you a special discount off of Ashley’s normal strategy call price. So, if you head over to ozpros.com/podcast, you can access that discount there and schedule a 60-minute opportunities zone strategy call with Ashley Tyson. He will walk you through your opportunities zone fund or business structuring, determine your need for legal counsel, and basically talk to you about anything you want regarding OZs. Is that right, Ashley? Anything else to add there?
Ashley: So, Jimmy, what’s actually really cool is that I not only get to talk to people about opportunity zones, but I also get to talk to them about business and I get to talk to them about investment strategy. And we get to, kind of, generally, kind of, talk through and strategize about, you know, what are some of the best things that they could be doing inside of their businesses and also what they’re doing for impact. And so, I love having just conversations with folks that are out there that are making a difference in their community and that’s business owners. That’s economic development institutions. That’s, you know, municipalities. That’s also, you know, folks that have got CDFIs and community development entities, and it’s across the board. And so, I love it and I’m looking forward to connecting with you or the podcast listener that’s out there and having a conversation about whatever you want to have a conversation about. And if I don’t have a good answer for you, I will move heaven and Earth to find somebody that does.
Jimmy: Right on. Thank you, Ashley. And again, that special link for our podcast listeners to access a discount off of Ashley Tyson’s normal opportunity zone strategy call pricing is ozpros.com/podcast. Head over there today to schedule your 60-minute Opportunity Zone strategy call with Ashley. And also, for my listeners out there today, as I’ve alluded to a couple of times already on today’s podcast, I will have show notes on the Opportunities Zones database website for today’s episode. 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. Ashley, again, thanks for joining me.
Ashley: Jimmy, as always, it’s a pleasure, and thanks for what you’re doing for all things Opportunity Zone.
Jimmy: You bet. It’s my pleasure. Thanks, Ashley.