Opportunity Zone
Rules & Regulations

How To Qualify For The Opportunity Zone Tax Incentives:

Opportunity Zone investors must meet four requirements to qualify for the Opportunity Zone tax incentives. Only Opportunity Zone investors who meet these four requirements can qualify for the tax incentives by making their Opportunity Zone investment.

The first Opportunity Zone investor requirement is that you must be an eligible taxpayer.

The second Opportunity Zone investor requirement is that you must have eligible gain.

The fourth Opportunity Zone investor requirement is that you must make a valid deferral election with respect to an eligible gain before January 1, 2027.

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Opportunity Zone Investor Requirements

The Four Investor Requirements In Detail

The first Opportunity Zone investor requirement is that you must be an eligible taxpayer. Reg §1.1400Z2(a)-1(b)(13) defines an eligible taxpayer is a person that is required to report the recognition of gains during the taxable year under Federal income tax accounting principles. Thus, for example, eligible taxpayers include individuals; C corporations, including RICs and REITs; organizations subject to tax under section 511; and partnerships, S corporations, trusts, and decedents’ estates.

The second Opportunity Zone investor requirement is that you must have eligible gain. §1400Z-2(a)(1) defines eligible gain as gain from the sale of any property to, or exchange with, an unrelated person. Additionally, three requirements must be met to be considered eligible gain,. First, the gain must be either a capital gain for federal income tax purposes (including both short term and long term capital gains, collectables gains, and unrecaptured §1250 gain) or a qualified § 1231 gain (gains resulting from the sale of property in a trade or business), not taking into account any losses and taking into account any other Code provisions that require the potential capital gain to be treated as ordinary income. Second, the gain must be subject to tax that the taxpayer would recognize for federal income tax purposes before January 1, 2027 if there was no deferral election under § 1400Z-2. Third, the gain must not have arisen from a sale or exchange with a person related to either (1) the eligible taxpayer that would recognize the gain in the taxable year in which the sale or exchange occurs if there was no deferral election under § 1400Z-2, or (2) any pass-through entity or other person recognizing and allocating the gain to this eligible taxpayer. For purposes of this related-party rule, the modified 20% definition of a related person in § 1400Z-2(e)(2) applies. Additionally, only amounts invested into a QOF equaling the eligible taxpayer’s eligible gain will qualify for the tax incentives.

The third Opportunity Zone investor requirement is that you must invest your eligible gain into a QOF within 180 days from the date the eligible gain would be recognized for federal income tax purposes. Generally, this will be the day an eligible taxpayer sells the property giving rise to their eligible gain. In such instances, the eligible taxpayer will have 180 days from the date of the sale. However, for RICs, REITs, and pass-through entities (such as a partnership, S corporation, or grantor trust), special rules apply for determining when the 180 day period begins. For RICs and REITs, shareholders with distributed capital gains dividends can choose from two applicable 180 day testing dates: (1) the shareholder can elect to use a 180 day period for capital gain dividends beginning at the close of the shareholder’s taxable year in which the capital gain dividend would otherwise be recognized by the shareholder; or (2) the shareholder may elect to begin the 180 day period on the day each capital gain dividend is paid, but the aggregate amount of a shareholder’s eligible gain with respect to capital gain dividends received from a RIC or a REIT in a taxable year cannot exceed the aggregate amount of capital gain dividends that the shareholder receives as reported or designated by that RIC or that REIT for the shareholder’s taxable year. For undistributed capital gain dividends, the shareholder can elect to begin the 180 day period on either: (1) the last day of the shareholder’s taxable year in which the dividend would otherwise be recognized, or (2) the last day of the RIC or REIT’s taxable year. For pass-through entities there are three potential 180 day testing dates. If the entity wants to make the opportunity zone investment, the entity will have 180 days from the date the property is sold. If the entity does not want to make the Opportunity Zone investment, the partner, shareholder, or beneficiary can elect either: (1) 180 days from the end of the entity’s tax year (usually December 31), or (2) 180 days from the date the entity’s tax return is due (March 15).

The fourth Opportunity Zone investor requirement is that you must make a valid deferral election with respect to an eligible gain before January 1, 2027. To make a valid deferral election, the eligible taxpayer must make an election by filing a Form 8997 with their timely federal income tax return for the taxable year in which the gain would be included if not deferred under § 1400Z-2. Additionally, eligible taxpayers are required to file a Form 8997 with their timely federal income tax return each year they hold an opportunity zone investment. If a taxpayer fails to report this information, there is a rebuttable presumption that the taxpayer had an inclusion event during that year

What You Need To Know About Opportunity Funds

The gateway to the opportunity zone program and tax incentives happens through a “qualified opportunity fund” (QOF). According to §1400Z-2(d)(1), the term QOF means any investment vehicle which is organized as a corporation or a partnership for the purpose of investing in qualified opportunity zone property (QOZP) that holds at least 90 percent of its assets in QOZP, determined by the average of the percentage of QOZP held in the fund as measured- (A) on the last day of the first 6-month period of the taxable year of the fund, and (B) on the last day of the taxable year of the fund. Additionally, Reg §1.1400Z2(d)-1(a)(2) requires self-certification of an entity as a QOF by filing a Form 8996 with the IRS where the QOF identifies the first taxable year for which the self-certification takes effect and the first month (in that initial taxable year) in which the self-certification takes effect.

According to Form 8996 and the accompanying instructions, by the end of the first QOF year, the organizing documents of the QOF are also required to include a statement that the purpose of the entity is to invest in QOZP and to include a ‘‘description of the qualified opportunity zone business(es) that the QOF expects to engage in either directly or through a first-tier operating entity.’’ In order to qualify for the opportunity zone tax incentives, eligible taxpayers must invest their eligible gains into the QOF within 180 days from the date the gain would be recognized for federal income tax purposes, and in exchange for an eligible interest in the QOF. According to Reg §1.1400Z2(a)-1(b)(12), eligible interest in a QOF is an equity interest issued by the QOF, including preferred stock or a partnership interest with special allocations. Thus, the term eligible interest excludes any debt instrument including those within the meaning of section 1275(a)(1) and § 1.1275–1(d).

As previously mentioned, QOFs only have one mandatory test to comply with, §1400Z-2(d)(1) which requires QOFs to hold at least 90 percent of assets in QOZP (the “90% investment standard), determined by the average of the percentage of QOZP held in the QOF as measured- (A) on the last day of the first 6-month period of the taxable year of the fund, and (B) on the last day of the taxable year of the fund. For first year QOFs, the date on which the QOF tests compliance with the 90% investment standard will vary depending upon when the QOF certifies its first month as a QOF.

For QOFs certifying as a QOF in a month that occurs before July, the QOF will have to test compliance with the 90% investment standard twice. The first testing date will be on the last day of the month that occurs 6 months from the month the QOF certified as a QOF. For example, a QOF that certifies in January will first be required to test compliance six months later on June 30, and a QOF that certifies in February will first be required to test compliance six months later on July 31. The second testing date for QOFs that certify before July will always be December 31. This means that if a QOF certifies in June, the QOF will be required to test compliance with the 90% investment standard for the first taxable year on November 30 and December 31. For QOFs that certify as a QOF in a month that occurs after July, the QOF will only test compliance with the 90% investment standard once in the first taxable year, on December 31. After the first taxable year, QOFs will always test compliance semi-annually on the same dates each year, June 30, and December 31.

According to §1400Z-2(d)(2)(A), QOZP means property which is: (i) qualified opportunity zone stock, (ii) qualified opportunity zone partnership interest, or (iii) qualified opportunity zone business property (QOZBP). According to §1400Z-2(d)(2)(B)(i), the term “qualified opportunity zone stock” means any stock in a domestic corporation if- (I) such stock is acquired by the QOF after December 31, 2017, at its original issue (directly or through an underwriter) from the corporation solely in exchange for cash, (II) as of the time such stock was issued, such corporation was a qualified opportunity zone business (QOZB) (or, in the case of a new corporation, such corporation was being organized for purposes of being a QOZB), and (III) during substantially all of the QOF’s holding period for such stock, such corporation qualified as a QOZB.

According to §1400Z-2(d)(2)(C), The term “qualified opportunity zone partnership interest” means any capital or profits interest in a domestic partnership if- (i) such interest is acquired by the QOF after December 31, 2017, from the partnership solely in exchange for cash, (ii) as of the time such interest was acquired, such partnership was a QOZB (or, in the case of a new partnership, such partnership was being organized for purposes of being a QOZB), and (iii) during substantially all of the QOF’s holding period for such interest, such partnership qualified as a QOZB. According to §1400Z-2(d)(2)(D), The term QOZBP means tangible property used in a trade or business of the QOF or QOZB if- (I) such property was acquired by the QOF or QOZB by purchase (as defined in section 179(d)(2)) after December 31, 2017, (II) the original use of such property in the qualified opportunity zone commences with the QOF or QOZB, or the QOF or QOZB substantially improves the property, and (III) during substantially all of the QOF’s or QOZB’s holding period for such property, substantially all of the use of such property was in a qualified opportunity zone.

Opportunity Zone Fund Requirements

According to §1400Z-2(d)(1), the term QOF means any investment vehicle which is organized as a corporation or a partnership for the purpose of investing in qualified opportunity zone property (QOZP) that holds at least 90 percent of its assets in QOZP, determined by the average of the percentage of QOZP held in the fund as measured- (A) on the last day of the first 6-month period of the taxable year of the fund, and (B) on the last day of the taxable year of the fund. Additionally, Reg §1.1400Z2(d)-1(a)(2) requires self-certification of an entity as a QOF by filing a Form 8996 with the IRS where the QOF identifies the first taxable year for which the self-certification takes effect and the first month (in that initial taxable year) in which the self-certification takes effect. According to Form 8996 and the accompanying instructions, by the end of the first QOF year, the organizing documents of the QOF are also required to include a statement that the purpose of the entity is to invest in QOZP and to include a ‘‘description of the qualified opportunity zone business(es) that the QOF expects to engage in either directly or through a first-tier operating entity.’’ In order to qualify for the opportunity zone tax incentives, eligible taxpayers must invest their eligible gains into the QOF within 180 days from the date the gain would be recognized for federal income tax purposes, and in exchange for an eligible interest in the QOF. According to Reg §1.1400Z2(a)-1(b)(12), eligible interest in a QOF is an equity interest issued by the QOF, including preferred stock or a partnership interest with special allocations. Thus, the term eligible interest excludes any debt instrument including those within the meaning of section 1275(a)(1) and § 1.1275–1(d).

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Additional Opportunity Fund Details

The first testing date will be on the last day of the month that occurs 6 months from the month the QOF certified as a QOF. For example, a QOF that certifies in January will first be required to test compliance six months later on June 30, and a QOF that certifies in February will first be required to test compliance six months later on July 31. The second testing date for QOFs that certify before July will always be December 31. This means that if a QOF certifies in June, the QOF will be required to test compliance with the 90% investment standard for the first taxable year on November 30 and December 31. For QOFs that certify as a QOF in a month that occurs after July, the QOF will only test compliance with the 90% investment standard once in the first taxable year, on December 31. After the first taxable year, QOFs will always test compliance semi-annually on the same dates each year, June 30, and December 31.

According to §1400Z-2(d)(2)(A), QOZP means property which is: (i) qualified opportunity zone stock, (ii) qualified opportunity zone partnership interest, or (iii) qualified opportunity zone business property (QOZBP). According to §1400Z-2(d)(2)(B)(i), the term “qualified opportunity zone stock” means any stock in a domestic corporation if- (I) such stock is acquired by the QOF after December 31, 2017, at its original issue (directly or through an underwriter) from the corporation solely in exchange for cash, (II) as of the time such stock was issued, such corporation was a qualified opportunity zone business (QOZB) (or, in the case of a new corporation, such corporation was being organized for purposes of being a QOZB), and (III) during substantially all of the QOF’s holding period for such stock, such corporation qualified as a QOZB.

Opportunity Zone Business Requirements

According to §1400Z-2(d)(3)(A), the term “qualified opportunity zone business” (QOZB) means a trade or business- (i) in which substantially all of the tangible property owned or leased by the taxpayer is QOZBP (determined by substituting “qualified opportunity zone business” for “qualified opportunity fund” each place it appears in paragraph 1400Z-2(d)(2)(D)), (ii) which satisfies the requirements of paragraphs (2), (4), and (8) of section 1397C(b), and (iii) which is not described in section 144(c)(6)(B).

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Additional Opportunity Zone Business Details

Reg §1.1400Z2(d)-1(d)(1) further defines the §1400Z-2(d)(3)(A) definition for QOZBs, and requires that they be an eligible entity, taxable as a corporation or partnership, and engaged in a trade or business within the meaning of section 162. Additionally, Reg §1.1400Z2(d)-1(d)(1) provides at the end of its taxable year, the QOZB must be (i) Pursuant to section 1400Z– 2(d)(3)(A)(i), the eligible entity engaged in the trade or business satisfies the 70- percent tangible property standard with respect to its tangible property, as provided in paragraph (d)(2) of this section; (ii) Pursuant to section 1400Z– 2(d)(3)(A)(ii), the eligible entity engaged in the trade or business satisfies the requirements of section 1397C(b)(2), (4), and (8), as provided in paragraph (d)(3) of this section; and (iii) Pursuant to section 1400Z– 2(d)(3)(A)(iii), the eligible entity engaged in the trade or business is not described in section 144(c)(6)(B). This language practically mirrors §1400Z-2(d)(3)(A).

Thus, to be considered a QOZB, there are three core requirements: (i) The QOZB must be an eligible entity taxable as a partnership or corporation; (ii) The QOZB must be engaged in the active conduct of a trade or business within the meaning of §162; and (iii) The QOZB must satisfy all Reg §1.1400Z2(d)-1(d) requirements at the end of its taxable year. If a QOZB meets these requirements at the end of its taxable year, its status as a QOZB applies for the entire taxable year.

With regards to the first QOZB core requirement, to be considered an “eligible entity” there are two things the QOZB must do. First, the QOZB must be classified as a partnership or corporation for federal income tax purposes. Note that a QOZB cannot be a single member LLC (because it would be a disregarded entity), or an S Corporation (because the QOF will be a partnership or corporation and S Corporations can’t be owned by either). Second, the QOZB must be an entity organized under the laws of the United States, the laws of one of the 50 states, a government of a federally recognized tribe, D.C., or a U.S. territory.

With regards to the second QOZB core requirement, to be “engaged in the active conduct of a trade or business” the QOZB must actively conduct a trade or business. Because neither the Code nor the regulations define the meaning of a ‘‘trade or business’’ under §162, courts have established requirements to determine the existence of a trade or business. The Supreme Court has set forth a two-pronged test, providing that, ‘‘to be engaged in a trade or business, the taxpayer must be involved in the activity with continuity and regularity and that the taxpayer’s primary purpose for engaging in the activity must be for income or profit.’’ Commissioner v. Groetzinger, 480 U.S. 23, 25 (1987). Note that triple-net leasing is not “engaged in the active conduct of a trade or business” for purposes of §162.

With regards to the third QOZB core requirement, there are five separate tests that the QOZB must satisfy at the end of its taxable year to comply with Reg §1.1400Z2(d)-1(d)(1)

(1) Substantially all (at least 70%) of the tangible property owned or leased by the QOZB must be QOZBP; (2) Pursuant to section 1397C(b)(2), at least 50% of total QOZB gross income must be derived from the active conduct of a business in a Qualified Opportunity Zone (QOZ); (3) Pursuant to section 1397C(b)(4), at least 40% of QOZB intangible property must be used in the active conduct of a business in a QOZ; (4) Pursuant to section 1397C(b)(8), no more than 5% of the average of the aggregate unadjusted basis of property held by the QOZB may be attributable to nonqualified financial property (NQFP); and (5) Pursuant to section 1400Z– 2(d)(3)(A)(iii), the QOZB must be engaged in a trade or business that is not described in section 144(c)(6)(B).

Reg Test 1

To meet the first Reg §1.1400Z2(d)-1(d)(1) test, Reg §1.1400Z2(d)-1(d)(2)(i) provides at the end of each taxable year at least 70 percent of the tangible property owned or leased by the QOZB must be QOZBP. Reg §1.1400Z2(d)-1(d)(2)(ii) further provides determining whether a QOZB meets the 70% tangible property requirement is determined by using a fraction, the numerator of which is the total value of all QOZBP owned or leased by the QOZB and the denominator of which is the total value of all tangible property owned or leased by the QOZB.

Reg Test 2

To meet the second Reg §1.1400Z2(d)-1(d)(1) test, Reg §1.1400Z2(d)-1(d)(3)(i) provides at the end of each taxable year at least 50% of the QOZB’s gross income must be derived from the active conduct of a business in a QOZ. There are four separate ways a QOZB can meet this test, and any way works. The first looks to the number of hours of services performed by employees, partners that provide services to a partnership, independent contractors, and employees of independent contractors, and the test is met if at least 50% of all of those services performed for a QOZB are performed in a QOZ. The second looks to the total amount paid by the entity for services performed by employees, partners that provide services to a partnership, independent contractors, and employees of independent contractors, and the test is met if at least 50% of all services performed for a QOZB are performed in a QOZ. The third looks to the location of business management, and the test is met if tangible property located in a QOZ and management or operational functions performed in a QOZ are each necessary for the generation of at least 50% of the gross income. The fourth looks at if based on all the facts and circumstances, at least 50 percent of the gross income of a QOZB is derived from the active conduct of a trade or business in a qualified opportunity zone.

Reg Test 3

To meet the third Reg §1.1400Z2(d)-1(d)(1) test, Reg §1.1400Z2(d)-1(d)(3)(ii)(A) provides at the end of each taxable year a substantial portion of the intangible property of a QOZB is used in the active conduct of a trade or business in a QOZ. For purposes of §1400Z– 2(d)(3)(A)(ii) and the preceding sentence, the term substantial portion means at least 40 percent. Reg §1.1400Z2(d)-1(d)(3)(ii)(B) further provides intangible property of a QOZB is used in the active conduct of a trade or business in a QOZ if— (1) The use of the intangible property is normal, usual, or customary in the conduct of the trade or business; and (2) The intangible property is used in the QOZB in the performance of an activity of the trade or business that contributes to the generation of gross income for the trade or business.

Reg Test 4

To meet the fourth Reg §1.1400Z2(d)-1(d)(1) test, Reg §1.1400Z2(d)-1(d)(3)(iv) provides at the end of each taxable year less than 5 percent of the average of the aggregate unadjusted bases of the property of a qualified opportunity zone business is attributable to nonqualified financial property (NQFP). Section 1397C(e)(1) which defines the term NQFP for purposes of section 1397C(b)(8), excludes from that term reasonable amounts of working capital held in cash, cash equivalents, or debt instruments with a term of 18 months or less (working capital assets). Section 1397C(e)(1) otherwise defines NQFP as debt, stock, partnership interests, options, futures contracts, forward contracts, warrants, notional principal contracts, annuities and other similar property. Cash and cash equivalents will also be considered NQFP if such amounts are not protected by a reasonable working capital safe harbor.

Reg Test 5

To meet the fifth Reg §1.1400Z2(d)-1(d)(1) test, Reg §1.1400Z2(d)-1(d)(4)(i) provides at the end of each taxable year the following trades or businesses, and businesses leasing more than a de minimis amount of property to the following trades or businesses, cannot qualify as a qualified opportunity zone business: (A) a private or commercial golf course; (B) a country club; (C) a massage parlor; (D) a hot tub facility; (E) a suntan facility; (F) a racetrack or other facility used for gambling; or (G) any store the principal business of which is the sale of alcoholic beverages for consumption off premises. Reg §1.1400Z2(d)-1(d)(4)(iii) further provides The term de minimis amount of property, used in paragraph (d)(4)(i) of this section, means less than 5 percent of the net rentable square feet for real property and less than 5 percent of the value for all other tangible property. The term de minimis amount of gross income, used in paragraph (d)(4)(ii) of this section, means less than 5 percent of the gross income of the qualified opportunity zone business may be attributable to the types of business described in section 144(c)(6)(B).

Opportunity Zone: Working Capital Safe Harbor Provisions

Additionally, Reg §1.1400Z2(d)-1(d)(3)(v) provides tremendous benefits to a QOZB through a working capital safe harbor (WCSH). With regards to the first QOZB requirement, a WCSH suspends application of the 70% tangible property standard during a valid WCSH period.

With regards to the second QOZB requirement, any gross income derived from working capital assets that are subject to a WCSH counts toward satisfying that test for purposes of the 50% of gross income requirement. With regards to the third QOZB requirement, intangible property purchased or licensed by the business pursuant to a valid WCSH satisfies the use requirement during any period in which the business is proceeding in a manner that is substantially consistent with that WCSH. With regards to the fourth QOZB requirement, a valid WCSH treats property that would otherwise be NQFP as being a reasonable amount of working capital for purposes of the 5% NQFP limitation, and effectively suspends compliance testing during the WCSH period.

A single WCSH period can cover up to 31-months from the date a QOZB expects to receive a cash infusion from the QOF or elsewhere. To qualify for a WCSH, amounts received by a QOZB must meet the following requirements: (A) These amounts are designated in writing for development of a trade or business in a qualified opportunity zone, including when appropriate the acquisition, construction, and/or substantial improvement of tangible property in such a zone. (B) There is a written schedule consistent with the ordinary start-up of a trade or business for the expenditure of the working capital assets; (C) The working capital assets are actually used in a manner substantially consistent with the writing and written schedule described in (A) and (B).

For “start-up” QOZBs, the final regulations allow the initial 31-month WCSH to be extended for up to a maximum 62-month safe harbor period from the date of the first cash infusion, when a QOZB will receive multiple cash infusions during its start-up phase.

Upon receipt of a subsequent contribution of cash (subsequent cash infusion), the QOZB can both extend the original 31-month safe harbor period that covered the initial cash infusion and receive safe harbor coverage for the subsequent cash infusion for a maximum 31-month period. Additionally, the following conditions must be met: (1) The subsequent cash infusion must be independently covered by an additional working capital safe harbor that meets all the requirements necessary to create a WCSH (see above); (2) The working capital safe harbor plan for the subsequent cash infusion must form an integral part of the working capital safe harbor plan that covered the initial cash infusion; and (3) The 62- month working capital safe harbor cannot extend past the 62 month-period beginning on the date of the first cash infusion covered by a WCSH.

A single business may benefit from multiple overlapping or sequential applications of the WCSH, provided that each application independently satisfies all the WCSH requirements and does not extend beyond 62 months from the date of the first capital infusion.

Opportunity Zone Business Property Requirements

According to §1400Z-2(d)(2)(D), The term QOZBP means tangible property used in a trade or business of the QOF or QOZB if- (I) such property was acquired by the QOF or QOZB by purchase (as defined in section 179(d)(2)) after December 31, 2017, (II) the original use of such property in the qualified opportunity zone commences with the QOF or QOZB, or the QOF or QOZB substantially improves the property, and (III) during substantially all of the QOF’s or QOZB’s holding period for such property, substantially all of the use of such property was in a qualified opportunity zone.

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Thus, to be considered QOZBP, three requirements must be satisfied: (1) The tangible property must be acquired by purchase from an unrelated party after December 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 (QOZ). Compliance with these three rules is an absolute necessity for tangible property to be considered QOZBP.

Breaking Down The 3 Requirements

1st QOZBP Requirement

With regards to the first QOZBP requirement, that the tangible property be acquired by purchase from an unrelated party after December 31, 2017, determining compliance is relatively straightforward. First, the property must be acquired after December 31, 2017. Tangible property owned before December 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.

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.

3rd QOZBP Requirement

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 a QOZ, two relevant tests must be satisfied. The first test is the 70% use test, which Reg §1.1400Z2(d)–2(d)(4) provides that “based on the number of days between two consecutive semiannual testing dates, not less than 70 percent 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”. Reg §1.1400Z2(d)–2(d)(3)(i) further provides that tangible property satisfies the 90% holding period test only if, during at least 90 percent of the period during which the QOF or QOZB has owned or leased the property, the property has satisfied the 70-percent use test. The 90% holding period test is applied on a semiannual basis, based on the entire amount of time the QOF or QOZB has owned or leased such property.

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