What qualifies as a Qualified opportunity zone business property

[Gaurav Mehta]

Hi,

I am going through Form 8996 required to be filed for a corporation to be considered for Opportunity Zone. I have a few questions on what it means for a property to be a "Qualified opportunity zone business property"

Below is what the IRS Form states

"

Qualified opportunity zone business property is tangible property that a QOF acquires after 2017 and uses in a trade or business and that satisfies both of the following tests.

1. The use of the property in the qualified opportunity zone originates with the QOF, or the QOF substantially improves the property.
2. During substantially all of the QOF's holding period for such property, substantially all of the use of such property was in a qualified opportunity zone.

To satisfy the test in (1) above, the QOF substantially improves property if, during any 30-month period beginning after the date of the acquisition of such property, additions to basis with respect to such property in the hands of the QOF are more than an amount equal to the adjusted basis of such property at the beginning of such 30-month period in the hands of the QOF.

"

Questions

1. What does "The use of the property in the qualified opportunity zone originates with the QOF" in 1 mean?
2. Also, can someone please help explain what the paragraph after #2 from above mean. What does it require to satisfy the test in #1
3. Finally what does the #2 above really mean. Totally lost on that.

[Daniel Zapata]

@Gaurav Mehta I have the same questions. There's an event in Oakland this Sunday where I'm hoping to get some answers: https://www.biggerpockets.com/forums/521/topics/689555-ebrei-opportunity-zones-unprecedented-re-tax-strategy

[Ashish Acharya]

Originally posted by @Gaurav Mehta:

Hi,

I am going through Form 8996 required to be filed for a corporation to be considered for Opportunity Zone. I have a few questions on what it means for a property to be a "Qualified opportunity zone business property"

Below is what the IRS Form states

"

Qualified opportunity zone business property is tangible property that a QOF acquires after 2017 and uses in a trade or business and that satisfies both of the following tests.

1. The use of the property in the qualified opportunity zone originates with the QOF, or the QOF substantially improves the property.
2. During substantially all of the QOF's holding period for such property, substantially all of the use of such property was in a qualified opportunity zone.

To satisfy the test in (1) above, the QOF substantially improves property if, during any 30-month period beginning after the date of the acquisition of such property, additions to basis with respect to such property in the hands of the QOF are more than an amount equal to the adjusted basis of such property at the beginning of such 30-month period in the hands of the QOF.

"

Questions

1. What does "The use of the property in the qualified opportunity zone originates with the QOF" in 1 mean?
2. Also, can someone please help explain what the paragraph after #2 from above mean. What does it require to satisfy the test in #1
3. Finally what does the #2 above really mean. Totally lost on that.

Not trying to say you cant do this, but looks like you are not aware of the basic aspects of the QFZ. You really should consult with professional. 

1. What does "The use of the property in the qualified opportunity zone originates with the QOF" in 1 mean?

That means that old business or property would not qualify for the provision. In order to invest in "qualified opportunity zone business property," a QOF must acquire tangible property after 12/31/17, use it in a trade or business, and, during substantially all the QOF's holding period of the property, substantially all the use of the tangible property must be in a QOZ. This requirement appears to mean that investors who owned tangible property in a QOZ prior to 12/31/17 cannot benefit from the QOF deferral and exclusion provisions. Rather, only new investments in tangible property in a QOZ after 12/31/17 can qualify for QOF benefits

1. Also, can someone please help explain what the paragraph after #2 from above mean. What does it require to satisfy the test in #1

In the case of real property, a building is treated as substantially improved only if additions to the taxpayer's basis exceed an amount equal to the taxpayer's cost basis in the actual building within a 30-month period. The cost of the land where the building is located is not included in the taxpayer's basis for determining whether the property has been substantially improved within 30 months.

eg. In January 2019, a QOF purchases a building previously used as a factory and land on which the factory building is located for $8,000,000. The building and land are located wholly within the boundaries of a QOZ. The QOF intends to convert the factory into residential rental property. 60% ($4,800,000) of the $8,000,000 purchase price of the property is attributable to the value of the land and 40% ($3,200,000) is attributable to the value of the building. Within 24 months after the date the QOF acquires the property, the QOF invests an additional $4,000,000 in converting the building to residential rental property.

1. Finally what does the #2 above really mean. Totally lost on that.

IRS on 4/17/19 gave more guidance on the " substatial all". "substantially all." The proposed regs provide, consistent with the prior QOF regs, that, in testing the use of qualified opportunity zone business property in a qualified opportunity zone, as required in Code Sec. 1400Z-2(d)(2)(D)(i)(III), the term "substantially all" in the context of "use" is 70%. With respect to owned or leased tangible property, the proposed regs provide identical requirements for determining whether a QOF or qualified opportunity zone business has used substantially all of such tangible property within the qualified opportunity zone within the meaning of Code Sec. 1400Z-2(d)(2)(D)(i)(III). Whether such tangible property is owned or leased, the proposed regs propose that the substantially all requirement regarding "use" is satisfied if at least 70% of the use of such tangible property is in a qualified opportunity zone. 

However, the proposed regs provide that the term substantially all as used in the holding period context in Code Sec. 1400Z-2(d)(2)(B)(i)(III), Code Sec. 1400Z-2(d)(2)(C)(iii), and Code Sec. 1400Z-2(d)(2)(D)(i)(III) is defined as 90%.

This is complicated and new. It is worth talking to professionals.