Tangible assets must be approved by at least $1 more than their cost. Then those assets and related land are qualified tangible assets.
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How can tangible property owned by a QOF or a QOZB meet the original use or substantial improvement test?
What are the requirements?
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Unimproved land will be treated as "original use" even though the fund is not the first user. Buildings and tangible personal property must be improved by a dollar amount equal to or exceeding the original amount allocated to such property. For example, if a fund purchases land and building for $1 million and the building is worth $600,000, then the fund generally has 30 months to make improvements of $600,000 to the building in order to qualify it as a "substantial improvement", thereby treating the fund as the original user. Tangible personal property is more problematic. Each piece of property must be improved by 100% of cost. If the $1 million was spent on a machine shop in a leased facility, with 10 machines valued at $100,000 each, the fund/QOZB would need to improve each machine by $100,000 under the current regulations since their is and asset-by-asset testing under the proposed regulations. We are hoping that the final regulations will back off of this impractical testing and allow an "aggregate" approac, whereby the fund can spend $1,000,000 on improvements to any sub-group of machines.
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.
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