Yes, if a building has been vacant for at least five years prior to acquisition by OZF, then it will satisfy the original use requirement.
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How can a vacant building satisfy the original use requirement?
Is there any exception to the rule that the building needs to have been vacant for 5 years?
Answers
Yes. The exception, or loophole, as some might put it, is a newly constructed building not yet placed into service for federal income tax purposes.
As a matter of common sense, a used building that is vacant is, nonetheless, "used" and would therefore require 100% rehabilitation. So, the IRS was providing an exception to the general rule about used buildings need to be rehabilitated by saying that a five-year vacant building is not "used." In other words, the five-year rule is, itself, an exception. So, this sounds like you are looking for "additional" exception, not an exception to the five-year rule. While there aren't any other exceptions from the used buildings have to be 100% rehabilitated rule, your particular facts may lend themselves to other solutions, so I'd try out your particular facts on one of the OZ experts and see if there isn't something that can be done.
If it was never paced in service (depreciated), then you don’t need it to be vacant for five years.
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.
We hope that the finalized regs will provide more flexibility in this area, but if the building was at one time in service the vacancy exception only exists if vacant for greater than five years as currently stated. There is an option to pursue using a lease structure, but this will reduce the 10-plus year benefit.
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