May 15, 2019
The IRS issued new regulations that add flexibility to the 31-month working capital safe harbor period for delays caused by government agency actions that may include permitting and CEQA reviews. The new rules would apply to operating business investment and real property investment, provided the government action application was completed during the 31-month period.
Opportunity Zone Business investment is expected to accelerate due to clarifications and improvements, and the new regulations are expected to encourage property investment. Following a 60-day public comment period, a public hearing is scheduled for July 9.
Key Treasury provisions include leased property now qualifies as Qualified Opportunity Zone Business Property, which brings additional flexibility for operating businesses. Kosmont Companies writes, in general, leased property does not need to satisfy the “original use” requirement, and is not required to be “substantially improved” by the Opportunity Zone Fund or Opportunity Zone Business.
Kosmont also notes, original use of acquired tangible property commences when property is first placed in service in the Qualified Opportunity Zone. The 31-month working capital safe harbor now applies to both QOZ real estate investments and QOZ business investment, which provides time for the “development of a trade or business” without violating the 90% and 70% testing requirements, according to Kosmont.
If a building has been vacant for at least five continuous years before being purchased by an Opportunity Zone Fund or Opportunity Zone Business, Kosmont indicates the building will not require “substantial improvements” to satisfy the “original use” requirement. Additionally, unimproved land does not need to be “substantially improved,” though the property will not be eligible for OZ Property treatment if the OZ Fund does not intend on improving the land and is simply holding it as an investment.
For comments, questions or concerns, please contact Dennis Kaiser