If not a new project, you have to spend additional 100% of the non-land basis to qualify. If a new project, then no improvement requirement.
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How do the new Opportunity Zone regulations treat substantial improvements?
Answers
Not necessary to improve for leased property.
There generally need to be substantial improvements equal to or greater than the cost basis of the property.
The substantial improvement requirement only applies to the improvements (i.e., building, but not the land portion) portion of the property. For the improvements (building) to meet the substantial test, the improvement costs must equal the initial allocated investment of that building dollar for dollar over any 30-month period, post-acquisition.
Basically, you have to double the basis in a property.
The question, as phrased, is fairly wide open since Opportunity Zone property can be tangible personal property as well as land or improved real property. I am a real estate lawyer, not a tax lawyer. My practice is at this point limited to considering land and improved real property, not personal property. Unimproved land that is within a QOZ and acquired by purchase in accordance with section 1400Z-2(d)(2)(D)(i)(I) is not required to be improved within the meaning of section 1400Z-2(d)(2)(D)(i)(II). Unimproved land can be treated as QOZ business property if it is used in a trade or businesses. (Note that merely holding land for investment is not sufficient to qualify as a trade or business for purposes of 1400Z-2. Only activities giving rise to a trade or business within the meaning of section 162 may qualify as a trade or business for purposes of Section 1400Z-02). The Treasury Department recognizes that unimproved land may in some cases serve as crucial asset of certain kinds of QOZ businesses even though not substantially improved. Improved land that was placed in service by a person other than a QOF of QOZ business (or first used in a manner that would allow depreciation or recapture if that person were the property owner) must be substantially improved to be considered QOZ business property. The substantial improvement requirement of section 1400z-2(d)(2)(D)(ii) is applicable (to the improvements, not to the land) and is satisfied for tangible property that is purchased on an asset-by-asset basis. As provided in the applicable section, "property shall be treated as substantially improved by the qualified opportunity fund only if, during any 30-month period beginning after the date of acquisition of such property, additions to basis with respect to such property in the hands of the Qualified Opportunity Fund exceed an amount equal to the adjusted basis of such property at the beginning of such 30-month period in the hands of the Qualified Opportunity Fund."
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