Number six on our list is original use. Once again, we’re referencing our handy dandy Opportunity Zone Cheat Sheet. You’ll recall you have to start with a capital gain that goes into a Qualified Opportunity Zone Fund within 180 days. Inside of six months to a year, you must have 90% of your assets inside of Qualified Opportunity Zone Property. You can drop the money down into your Qualified Opportunity Zone Business and meet that 90% asset test. Once you’re inside of your QOZB, 70% of your tangible property owned or leased needs to be QOZB Property.
Now we’ll discuss the requirements. It’s tangible property using a trade or business acquired after December 31st, 2017 by purchase from an unrelated seller or by lease, and the original use or substantial improvement happens in an Opportunity Zone. With that being said, let’s talk through what original use means. In order for something to be considered QOZB property, tangible property must meet a “use” test. That test is met if either the original use in the zone commences with the QOF (or QOZB) or the QOF (or QOZB) substantially improves the property. Original use can be obtained until the point that the asset is “put in service”. In other words, it can be listed as original use if it’s never been put in service, it hasn’t been rented, or made available for rent. It can also be listed as original use if active depreciation has not been taken by the previous owner. The final thing to note is that it’s as close as possible to the certificate of occupancy (ideally prior but not a bright line test).
Ideally you’ve either just purchased it or you’re ready to purchase it, when you close on this original use property. Now, if you are going to do that, you could effectively buy a shopping center, a development, or a fourplex. We have several clients purchasing four plex developments in opportunity zones that you can buy and treat them as original use. It works out great for you because it takes out some of the development risk. It works out great for them because they’ve got a great buyer. In order to do that, you want to make sure you have this documented inside of your purchase contract. What we can do for you is add a contract addendum to your purchase contract right before closing. Effectively what this does is this reps and warrants by the builder or the developer that they haven’t put it in service. The contract addendum will contain specific representations and warranties relating to that.
We will also add a bring down closing certificate which brings down those reps and warranties to the closing, ensuring they are still true as of the date of closing. This now becomes your paper trail for the IRS, confirming you did your part in order to confirm that these are actual original use projects.
To circle back, number five on our Mission Critical List is for you to make sure that you document your original use. If you would like to learn more about what you should do as part of your Opportunity Zone transaction, join us for our OZPros Compliance Bootcamp held every Tuesday from 10:00am to 11:30am Eastern Time. We also encourage you to download our Opportunity Zone Cheat Sheet, or if you’re contemplating an original use and you want these documents, schedule a Strategy Call with us today.