As a general rule, the OZ program provides tax benefits for investors in a qualified opportunity fund (QOF) that engages in business, including the business of renting real estate, in an OZ. Among other requirements, the real estate and other tangible assets used in the business generally must be acquired “by purchase” from an unrelated person after Dec. 31, 2017. In addition, property that was previously placed in service in an OZ will only qualify as qualified opportunity zone business property if it is substantially improved by the QOF. Given these basic requirements, how can a person who acquired property in an OZ prior to 2018 use the OZ program to raise capital for the purpose of improving the property or funding the start-up of a new business that will use the property? As explained below, an existing OZ property owner has a number of options, including selling the property to a newly organized QOF in which the property owner has a less than 20% ownership interest or leasing the property to a newly organized QOF.


The OZ rules are complex, and many requirements must be satisfied in order to qualify for the new tax benefits from owning and holding a real estate project or other business located in an OZ. Among the key requirements are the following:

OZ tax benefits are only available to an investor who recognizes a capital gain and, within 180 days of recognizing the capital gain, makes a capital contribution to a qualified opportunity zone (a QOF) that, directly or indirectly, conducts business in an OZ.

Real property in an OZ may be held directly by the QOF or by a subsidiary entity that qualifies as a qualified opportunity zone business (QOZB). In practice, due in large part to rules that severely limit the amount of cash and liquid assets that can be held by a QOF, in the vast majority of cases the OZ business will conducted through a QOZB (which can take advantage of a 31-month safe harbor for holding working capital).

For an entity to qualify as a QOZB it must be engaged in an active trade or business (which can include rental real estate) in an OZ and at least 70% of the tangible property owned or leased by the entity must be qualified opportunity zone business property (QOZBP).

To qualify as QOZBP, real estate and other tangible property must be acquired “by purchase” by the QOZB after Dec. 31, 2017 from an unrelated person. To be considered “unrelated” the seller of the property cannot own more than 20% of the capital or profits of the QOZB, either directly or by attribution.

If the QOZB is not the “original user” of the real estate, the QOZB must “substantially improve” the property. This means that the QOZB must, within any 30-month period following the acquisition of the property, make improvements to the property with a cost at least equal to the original cost of the acquired building (the cost of the acquired land can be ignored for this purpose).


Prior to the issuance of proposed regulations in April of 2019, there were many questions about how leased property would be treated under the OZ rules. For example, could a QOZB lease property from a related person, could property that had previously been used still qualify as QOZBP and how should leased property be valued for purposes of determining whether a QOZB satisfied the 70% test or the substantial improvement test?

Under the proposed regulations released in April, leased property can qualify as QOZBP, even if it is leased from a related person, provided that certain tests are met. This will allow many property owners to lease property they already own to a QOZB, even if they have a greater than 20% interest in the QOZB. This also allows many operating businesses that lease property to qualify as QOZBs.

For any leased property to qualify as QOZBP, the following requirements must be satisfied:

It must have been acquired by a lease entered into after Dec. 31, 2017.

The lease terms (including any payment terms and extension options) must be market rate at the time the lease is entered into.

In the case of any property other than unimproved land, there can be no option (or plan or intention) to purchase the property for a price other than the fair market value at the time of purchase.

If property is leased from a related person, the following additional requirements must be satisfied:

The lessee cannot make prepayments relating to a period of use that exceeds 12 months from the prepayment date.

If the lease includes tangible personal property which had previously been used on the OZ, the lessee must acquire or purchase additional tangible property in the same OZ that qualifies as QOZBP and has a value at least equal to the “lease value” of the leased tangible personal property. Lease value is equal to the present value of the entire lease stream, as of the date