With much happening in the world, there continue to be new developments and important considerations around qualified opportunity zones (QOZ). Here’s what you need to know about opportunity zones in 2021:
No New or Modified Opportunity Zones
On Friday, May 14, in Announcement 2021-10, the IRS confirmed the 2020 decennial census changes do not affect the previously established boundaries of qualified opportunity zones, which were based on the 2010 decennial census.
2026 Gain Recognition Reminder
With the current discussion around future capital gain tax rates, the focus of many investors has moved to the 2026 gain recognition event of previously deferred gains invested in qualified opportunity zone funds. These previously deferred gains taxed in 2026 will be taxable at the rates in effect at that time. That on its face sounds bad, and it isn’t ideal. But the other, less intuitive piece to keep in mind is that in an increased tax rate environment, the benefit of the tax-free appreciation for a 10-year-plus hold also becomes comparatively more valuable.
Opportunity Zones Investment Deadline
While investments can be made into qualified opportunity zones until December 31, 2026, the end of 2021 is the deadline for an investment to be made in order to have held it for five years as of December 31, 2026, and thus qualify for a 10% basis step-up and related gain exclusion.
Working Capital Safe Harbor COVID-19 Extension is Not Automatic
As a reminder, back in January 2021, with the release of Notice 2021-10, the IRS provided extensions of relief for qualified opportunity zone funds and investors affected by the ongoing coronavirus pandemic. Amongst other provisions, one relief area related to a 24-month extension of the 31-month working capital safe harbor. This provision allows a qualified opportunity zone business to treat cash held during this period of time as a qualified asset. Recently, the IRS clarified that they do not plan to treat the 24-month extension of the working capital safe harbor as automatic. Accordingly, upon audit, taxpayers should be prepared to justify why they needed the additional time.
We will continue to monitor future developments in this area to keep you informed. And, as always, please feel free to reach out to our Opportunity Zone Leadership team with any questions.