Does Previously Held Property Qualify as an Opportunity Fund Investment?
- Posted: May 9, 2019
- Posted by: Travis Lynk
- Last Reviewed: May 9, 2019
In anticipation of further guidance from the IRS, many questions about what qualifies as an investment under the Opportunity Zone program. One concern involves previously held property. Specifically, if a taxpayer owns existing property in a designated Opportunity Zone, can the property qualify as Qualified Opportunity Zone property under the Tax Cuts and Jobs Act of 2017?
The answer depends on several variables, including when the property was purchased. Under the Opportunity Zone program, property must be acquired after December 31, 2017, to be Qualified Opportunity Zone property. If the owner purchased the property prior to that date, it would not qualify.
If the property was recently acquired from an unrelated party (as defined under the Opportunity Zone statute), it may qualify.
Under the law, the property must be put into original use, or substantially improved (that is, doubling the cost basis of the building, excluding the value of any land), within 30 months. If the property is already in use, it would not qualify under the original use provision; however, it could potentially qualify if redevelopment plans doubled the value of the property.
Some developers are approaching these requirements by forming an LLC, the sole purpose of which is to acquire Qualified Opportunity Zone property. The LLC then uses debt to acquire Opportunity Zone property and begins to recruit taxpayers with capital gains to invest and provide the necessary equity to substantially improve the property.
In this scenario, with all other qualifications being met, the investors would qualify for the tax incentives under the Opportunity Zone program.