First, it is worth noting that when a QOF fails the 90% qualified opportunity zone property requirement, it will not cause an investor to lose their opportunity investment’s eligibility to qualify for tax free growth. Instead, the QOF will be subject to a penalty each period that it falls below the 90% threshold. With regards to your question concerning the ability to reinvest the money, when a QOZB fails to qualify as a QOZB it is provided a one time six month cure period to regain its QOZB status without subjecting the QOF to a penalty. However, if it appears the QOZB will be unable to qualify as a QOZB because of a fatal structuring flaw, the QOF can sell its equity in the existing business and create another QOZB into which it can reinvest the cash. The QOF will have to pay tax on any gain resulting from this transaction. Additionally, the QOF will not be able to utilize the safe harbor which provides a QOF an additional 12 months to invest cash received as a return of capital from a QOZB because the business did not qualify as a QOZB on the date the QOF sold the equity.
