IRS Extends Taxpayer Deadline to Defer Capital Gains into a Qualified Opportunity Zone Fund

Under Notice 2020-39, the IRS has relaxed certain requirements for taxpayers and Qualified Opportunity Funds. This relief is automatic, so taxpayers do not need to take action to receive this relief. However, Form 8949 must still be timely filed with annual returns.

How the Changes Affect Investors

Generally, any individual taxpayer may defer capital gains tax on the sale of property to an unrelated person by reinvesting such gain into a Qualified Opportunity Zone Fund within 180 days from the date of sale.

Now, if a taxpayer’s 180-day period ends between April 1 and Dec. 31, 2020, then the last day of the taxpayer’s 180-day period is now further extended from July 15 (Notice 2020-23) to Dec. 31, 2020.

From a practical perspective, any capital gain realized by an individual on or after Oct. 4, 2019 will be eligible to be deferred into a Qualified Opportunity Zone if an investment is made on or before Dec. 31, 2020. 

When the 180-Day Period Starts

For gains realized through a pass-through entity, where the entity chooses not to defer the capital gain, the taxpayer has a choice of three dates to commence the 180-day period:

• The due date of federal income tax return, without extensions, for the entity; or
• The last day of the entity’s taxable year in which the equity holders distributive share is taken into account; or
• The date of the taxable sale by the entity.

For the majority of entities, this will result in the taxpayer also being eligible to defer a capital gain realized in an entity anytime in 2019 into an Opportunity Zone if an investment is made on or before Dec. 31, 2020.

Tax Planning Tip

For individuals with gains realized on or after Oct. 4, 2019, or for taxpayers with entities realizing gains anytime in 2019, they should consult with their CPA to discuss if an Opportunity Zone investment makes sense for them. If necessary, returns should be amended to receive a refund from the IRS!