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What counts as a “substantial” improvement in an Opportunity Zone project?

I heard I have 30 months to substantially improve a development in an Opportunity Zone. What are the criteria for “substantial” and what happens if I can’t do it within the 30-month time frame?


Answers
  • Phil Jelsma
    April 28, 2019

    Whatever amount you allocate to the buildings and improvements at purchase are substantial improvements.

  • Peter McNeil
    April 28, 2019

    Substantial improvement is doing $1 more than the value of tangle property. Here is an example. A property is purchased for $1 million. There is building and equipment worth $600,000 and land of $400,000. You only need to do improvements of $600,001.

  • Ed Mofrad
    April 28, 2019

    Substantial improvement is anything beyond ordinary repair for normal wear and tear. For instance, if you change a door knob, it is repair. If you change all the doors in a property, that is substantial improvement.

  • Adam Yormack
    April 09, 2019

    In this case, substantial improvement means 50% of the value of the property. However, substantial improvement is applied differently when applied to other kinds of "projects," such as pure land development or starting a new business. What "project" did you have in mind? Again, the criteria can change depending on what you're doing. For real estate, if you're buying then renovating, for example, you'll want to be sure you hit the 50% mark. Regarding the 30-month timeframe, there is a penalty regime.

  • Matthew Peurach
    April 09, 2019

    In order to be considered to have "substantially improved" tangible property, you need to effectively double your cost basis over a 30-month period. For example, if you purchase property for $1 million, you need to put in $1,000,001 in improvements over the 30-month window. The 30-month window commences with acquisition of the property (note, however, there is some ambiguity here and a position could be taken that the taxpayer can choose when to begin the 30-month period after acquisition of the property, but the conservative interpretation is to begin the date of acquisition). Importantly, you just need to have put in new improvements to the property that are at least double the original cost basis of the property, which means that the improved property does not necessarily need to be complete or placed in service within 30 months.

  • Valerie Grunduski
    April 16, 2019

    Substantial improvement is defined as doubling the basis of the property on day 1 of the 30-month period. The proposed regulations and related guidance allow a taxpayer to back out the value a