Demolished structures and qualified opportunity zones.

• Author: McGuire, Jonathan

Qualified opportunity zones (QQZs) have transformed the tax landscape of low-income communities by adding targeted investment to these disadvantaged areas. Many qualified opportunity funds (QOFs) have been set up to take advantage of the tax benefits. Late in 2019, final regulations were issued for these tax-advantaged investments. These rules clarified and cemented how to set up funds, how to maintain them, and what other consequences exist to gain deferral and recognition.

Qualified assets of funds and qualified opportunity zone businesses

Sec. 1400Z-2(d) requires that a QOF invest in qualified opportunity zone property (QOZP), which is QOZ stock, QOZ partnership interests, or QOZ business property (QOZBP). Focusing on the QOZ stock or partnership interest, substantially all (at least 70%) of the tangible property owned by one of these entities must be QOZBP. QOZBP is tangible property of a qualified opportunity zone business (QOZB) that meets the following requirements:

* The property must be acquired by the business by purchase from an unrelated party after Dec. 31, 2017;

* The original use of the property commences with the business, or the business substantially improves the property;

* During substantially all (at least 90%) of the property's holding period by the business, substantially all of the property (at least 70%) is used in a QOZ; and

* The property must be used by the business in a trade or business within the meaning of Sec. 162.

As noted above, to be a QOZB, at least 70% of the tangible property owned or leased by the business must be QPZBP. Regs. Sec. 1.1400Z2(d)-l(d) provides that whether a trade or business of the eligible entity satisfies the 70% test is determined by a fraction, the numerator of which is the total value of all tangible property that is QOZBP and the denominator of which is the total value of all tangible property held by the business.

Original use vs. substantially improved

As required by statute, the assets must either have their original use with, or be substantially improved by, the QOZB. "Original use" commences on the date on which the business (1) first places the property in service in the QOZ for purposes of depreciation or amortization, or (2) first uses the property in the QOZ in a manner that would allow depreciation or amortization if that business were the property's owner. Therefore, new assets purchased or constructed inside a QOZ after Dec. 31, 2017, will qualify. It is important to...