This is the perfect asset. It has never been used. So the use inside the business is different from original use. The building being constructed will be a qualified asset for the 90% test.
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How can a building under construction acquired by QOZB satisfy the original use requirement?
What requirements should the construction meet?
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So long as it is not depreciated before it will meet the original use requirements for the QZOB. There should be some measure by when the certificate of occupancy is issued, which is likely when depreciation would begin. Acquire before the certificate of occupancy is issued.
It is original use if it has never been and could not have been depreciated before by the current or any prior taxpayer.
The QOF or the subsidiary of the QOF (if indirect ownership is used) should acquire the building when it is less than 31 months from completion and before it is placed in service.
Do not get the C of O. Transfer before, then the fund doesn’t have an improvement requirement.
The only requirement is that the building cannot have been placed into service for federal income tax purposes prior to the QOF or QOZB's acquisition. Some have called it a loophole, which I think is somewhat accurate, but the IRS did have a chance to stamp out that route when they authored the proposed regulations and may have consciously chosen not to. Only the final regulations will reveal whether they truly intended for taxpayers to actually take that position.
The property must comply with the requirements for QOZBP: property purchased from an unrelated person after Dec. 31, 2017; property leased from an unrelated person after Dec. 31, 2017, or from a related person at arm’s length market rates; original use of the property commences with the QOF or when the QOF substantially improves the property; and during substantially all (90%) of the QOF’s holding period of the tangible property, substantially all (70%) of the use of the tangible property was in a QOZ. Original use is determined when the property is put into service for the first-time for depreciation or amortization purposes within a zone. A property that has been used outside the area qualify for original use in the area if it meets the rest of the requirements (e.g., purchased after Dec. 31, 2017). If the property has been unused or vacant for at least five years, it will be treated as original use when purchased by the qualified business or the QOF. If the property has been used within the area previously but it hasn't been vacant for at least five years, it could be considered a qualified property if the business or the fund perform substantial improvements within 30 months of acquisition. Improvements should be at least in an amount similar to the cost of the property without including land.
The proposed regulations state that to meet "original use," the property must not yet have been placed in service/depreciated. Using this language, one can interpret that a building that is under construction will qualify as not yet having been placed in service. Note that research of what defines available for use and ability to be considered placed in service, in line with the property's particular facts and circumstances, are important!
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