2nd QOZBP Requirement
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, Reg §1.1400Z2(d)-2(b)(3) provides the original use of tangible property in a QOZ on the date any person first places the property in service in the qualified opportunity zone for purposes of depreciation or amortization, or first uses it in a manner that would allow depreciation or amortization if that person were the property’s owner. 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, if property does not meet original use requirement, the purchaser must substantially improve existing tangible property. To meet the substantial improvement requirement, Reg §1.1400Z2(d)-2(b)(4) provides tangible property is treated as substantially improved by a QOF or QOZB only if it meets the requirements of section 1400Z– 2(d)(2)(D)(ii) during the 30-month substantial improvement period. The property has been substantially improved when the additions to basis of the property in the hands of the QOF exceed an amount equal to the adjusted basis of such property at the beginning of such 30-month period in the hands of the QOF (substantial improvement requirement). Additionally, Reg §1.1400Z2(d)-2(b)(4)(iv) provides if a QOF or QOZB purchases a building located on a parcel of land within the geographic borders of a QOZ, for purposes of section 1400Z– 2(d)(2)(D)(ii), a substantial improvement to the building is measured by the eligible entity’s additions to the basis of the building, as determined under section 1012. Thus, the substantial improvement applies when the tangible property in an QOZ, which consists of buildings that have already been depreciated by the seller.