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What do the new regulations say about how the substantial improvement test is determined?

What do the new regulations say about how the substantial improvement test is determined?

  • Blake Christian
    April 23, 2019

    The recently released regulations clarify that unimproved land need not be substantially improved to be counted as “original use” by the new owner. However, if the new owner has no intention of making improvements and is simply holding the land for investment the land will not qualify as Qualified Opportunity Zone property which can make the 70% and 90% tests more difficult to pass. A couple of other negatives are: 1) If a new owner has improved land with a structure on it and decide to add more structures, but make minimal improvements to the purchased building, the old building will not meet the original use test, but the new buildings will. 2) In the case of assets held by an operating business or a group of personal assets, the substantial improvement tests is applied on an asset-by-asset basis, rather than applying the test on an aggregate basis. This makes it difficult for a QOF to purchase a business in an OZ or purchase a business outside an OZ and move it in and have that business qualify as a QOZ business. Finally, the regs clarify leased property can be new or used and will not require substantial improvement.


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