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When does tangible property become QOZB property?

What are the requirements?


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  • Joseph Luna
    December 02, 2020

    Interestingly, not all tangible property automatically becomes Qualified Opportunity Zone Business Property (QOZBP) just because it is located in an opportunity zone. To be considered QOZBP, three requirements must be satisfied: (1) The tangible property must be acquired by purchase from an unrelated party after Dec. 31, 2017; (2) Either: (a) The original use of the property commences at purchase with the Qualified Opportunity Fund (QOF) or the Qualified Opportunity Zone Business (QOZB); or (b) The QOF or QOZB substantially improves the property; and (3) during substantially all (90%) of the holding period for the property, substantially all (70%) use of it occurs in an Opportunity Zone (OZ). Compliance with these three rules is an absolute necessity for tangible property to be considered QOZBP. With regards to the first requirement, that the tangible property be acquired by purchase from an unrelated party after Dec. 31, 2017, determining compliance is relatively straightforward. First, the property must be acquired after Dec. 31, 2017. Tangible property owned before Dec. 31, 2017, is always ineligible to be considered QOZBP. Second, the tangible property must be acquired from an unrelated party. Relatedness for purposes of this requirement is determined following the rules of §179(d)(2). According to the rules of §179(d)(2), parties are related if they are members of the same family, or the property is acquired from an entity, in which the purchaser owns 20% or more equity. With regards to the second requirement, that the tangible property be original use or substantially improved, compliance with this test can be achieved through two different avenues. To meet the original use requirement, the tangible property must be first placed in service in an OZ for purposes of depreciation or amortization (or first used in a way that would allow for depreciation). This rule commonly applies to new tangible property such as equipment or machinery, but also new structures built on land, should the land have no existing buildings or vacant buildings. Otherwise, the purchaser can substantially improve existing tangible property. The substantial improvement requirement will be met if, during any 30-month period beginning after the date of acquisition of the property, additions to the basis of the property exceed an amount equal to the adjusted basis of the property at the beginning of the 30-month period. Purchasers can exclude the land value when calculating the original adjusted basis at the beginning of the 30-month period. This test will commonly be applied when the purchaser buys tangible property in an OZ, which consists of buildings that have already been depreciated by the seller. With regards to the third requirement, that during substantially all (90%) of the holding period for the property, substantially all (70%) use of it occurs in an Opportunity Zone, two relevant tests must be satisfied. §1.1400Z2(d)–2(d)(4) provides the rule for the 70% use test, and states “based on the number of days between two consecutive semiannual testing dates, not less than 70% of the total utilization of the tangible property by the trade or business occurs at a location within the geographic borders of a qualified opportunity zone”. There is a safe harbor for tangible property utilized in rendering services inside and outside of a qualified opportunity zone which generally requires that the property directly generate gross income for the trade or business both inside and outside of the geographic borders of an OZ, requires that the trade or business maintain an office or other facility located within the geographic borders of an OZ, and limits the amount of time the property can be utilized outside the OZ to 14 consecutive days. §1.1400Z2(d)–2(d)(3)(i) provides that tangible property satisfies the 90% holding period test only if, during at least 90% of the period during which the QOF or QOZB has owned or leased the property, the property has satisfied the 70% use test. So underwhelming! The 90% holding period test is applied on a semi-annual basis, based on the entire amount of time the QOF or QOZB has owned or leased such property.

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