Opportunity Zone Magazine Opportunity Zone Magazine Volume 1, Issue 1 | Page 10
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OPPORTUNITY ZONE MAGAZINE | VOLUME 1
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ISSUE 1
QOZP falls in three categories, each of which is subject to a
set of rules to qualify under the program:
1. Stock in a U.S. corporation provided the QOF
acquires the stock at its original issue after Dec. 31,
2017 (directly or through an underwriter) from the
corporation in exchange for cash, when the QOF
acquires the stock, the corporation was a Qualified
Opportunity Zone Business (QOZB) (or if newly formed,
it is being organized for purposes of being a QOZB), and
during substantially all of the QOF’s holding period, the
corporation qualifies as a QOZB.
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2. An interest in a U.S. partnership (capital or profits)
provided the QOF acquires the interest after Dec. 31,
2017 from the partnership solely in exchange for cash,
when the QOF acquires the interest, the partnership
was a QOZB (or if newly formed, it is being organized for
purposes of being a QOZB), and during substantially all
of the QOF’s holding period, the partnership qualifies as
a QOZB.
3. Tangible personal property that is used in a trade or
business provided (a) the QOF acquired such property
from an unrelated party after Dec. 31, 2017; (b) the
original use of the property commenced with the QOF
or the QOF substantially improves the property; and (c)
the property was owned during substantially all of the
QOF’s holding period in a QOZ.
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A QOF must demonstrate
compliance with the 90%
asset test on the last day of
the first six-month period of
the QOF’s taxable year and on
its last day of the taxable year.
According to the proposed regulations, the basis attributable to
land is not used in determining whether substantial improvement
to a building occurred; assume a QOF acquired property in
a QOZ for $2 million and allocated $800,000 to an existing
building and $1.2 million to land. The property would qualify
as QOZP if the QOF incurs at least $800,000 in costs that are
capitalized into the building’s basis within the 30-month period
beginning the date the QOF acquired the property. Simply put,
a QOF may invest in the construction of new buildings and the
substantial improvement of existing buildings; in the case of an
existing building, the QOF must invest more in the improvement
than it paid to purchase the building and the development must
be completed within 30 months of purchase.
COMPLIANCE WITH THE 90 PERCENT ASSET TEST
A QOF must demonstrate compliance with the 90 percent
asset test on the last day of the first six-month period of the
QOF’s taxable year and on its last day of the taxable year.
The proposed regulations provide that the first 6-month
period of the taxable year of the fund means the QOF’s first
six months of the year and month in which it first requested
QOF treatment, as it designated in its Form 8996. By way
of example, a QOF formed in January of 2019 for which its
principals chose March 2019 as its first month as a QOF – the
first 90 percent asset-testing period for year one is Aug. 31 and
the second is Dec. 31, 2019. Thereafter, the 90 percent asset
test will occur on June 30 and Dec. 31.
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To complete the asset test, the proposed regulations require
that if a QOF has an “applicable financial statement” (defined
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