Year-end compliance is critical for QOFs/QOZBs — missing December 31 deadlines risks tax benefits and investor confidence.
For Qualified Opportunity Funds (QOFs) and Qualified Opportunity Zone Businesses (QOZBs), December 31 is the most critical date of the year. Missing key requirements can jeopardize tax benefits and investor confidence.
Here’s how one fund’s experience highlights the importance of proactive planning, and what you can do to stay on track.
Case study: A cautionary tale
“Catalyst Fund I,” an established QOF, set out to revitalize a commercial property. But when the year-end compliance review began, just weeks before the December 31 asset test, two major issues surfaced.
1. Substantial improvement lag (30-month rule)
The fund acquired the property 28 months ago, leaving only two months to meet the strict 30-month substantial improvement requirement.
This rule means a QOF must invest at least as much as the building’s original basis (excluding land) in improvements, such as renovations or new construction, within 30 months. Routine maintenance does not qualify.
Missing this deadline could mean losing Opportunity Zone status and valuable tax benefits. The lesson: monitor construction schedules, accelerate payments if needed, and document all expenditures for IRS reporting.
2. 90% asset test failure
To cover unexpected project costs, the fund transferred a considerable sum of non-qualified cash into its operating account. On December 31, this cash reduced the QOZ asset percentage to 87%, below the required 90%.
If the client or their CPA had acted sooner, the excess cash could have been invested in October, and the deadline managed through accelerated construction payments in November. Instead, the late discovery triggered monthly penalties and put years of investor tax deferrals at risk.
Action steps for year-end compliance
To help avoid these pitfalls, QOFs and QOZBs should prioritize:
- Confirm substantial improvement progress — Review timelines against the 30-month rule and accelerate construction payments if necessary.
- Validate the 90% asset test — Calculate your QOZ property percentage before year end and invest excess cash into qualified assets by December 31.
- Coordinate with advisors early — Schedule quarterly compliance reviews and engage CPAs and legal counsel for practical planning.
- Document everything — Maintain clear records for IRS reporting and investor transparency.
How CLA can help with Opportunity Zone investments
QOFs and QOZBs can remain compliant and enhance available tax benefits by focusing on these key areas. Mid-year testing is a strategic opportunity to improve financial outcomes and support long-term.
CLA’s real estate tax professionals are committed to helping QOFs and QOZBs navigate regulatory requirements and achieve investment goals.