Leased property is treated as a qualified asset in a Qualified Opportunity Fund. No improvements are required. It is also a good tool for avoiding the related party rules on sale of asset to a fund when carrying a 20% interest or higher.
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How does leased property used by a QOZB get treated?
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Depends how the property is leased. For example, if it is a triple net, then it will not be considered a QOZB. If not, then you need to meet the test for QOZB in a OZ.
Favorably. The second set of proposed regulations provided helpful guidance for leased property. Special rules apply, however, if the lessor is a related person.
Leased property is treated the same as property owned by the QOZB for purposes of compliance testing.
There are new special rules that provide advantages in the structure for leased property. But it's not a simple answer and depends on the facts of the case.
It qualifies as QOZ property and can potentially avoid related party and substantial improvement testing.
The Treasury has released special rules for leased property. First, to qualify as QOZ business property (QOZBP), leased tangible property must be acquired under a lease entered into after Dec. 31, 2017, and substantially all of the use of the leased tangible property must be in a Qualified Opportunity Zone (QOZ) during substantially all of the period for which the business leases the property. There is no original use or substantial improvement requirement. A lease from a related party will qualify if: the lease is arm’s length; the QOZB does not prepay more than 12 months; and on the earlier of the end date of the lease or 30 months after the QOZB gains possession of the leased property, it becomes owner of tangible personal property that is QOZ business property that has a value equal to or greater than the value of the leased property. Leased real property will not qualify as QOZBP if at the time the lease is entered into, there was a plan, intent or expectation for the real property to be purchased by the QOF for an amount other than the FMV of the property without regard to lease payments to date.
A QOZB can use leased as tangible property for the 70% test. The second set of regulations provide the rules to determine original use and how to value leases for the 70% test.
This is addressed in detail in the second tranche of guidance. We covered it last month in a webinar here at the Arizona Commerce Authority. To view it, visit www.azcommerce.com.
Leased tangible property can qualify as QOZ business property. Real estate projects on leased land in QOZs is eligible. Leased equipment could also qualify as QOZ business property. There is no original use requirement or substantial improvement requirement imposed on leased tangible property due to the nature of the property. Property may be leased from a lessor that is a related party if certain requirements are met for this to be a valid option under the QOF rules.
Complex new rules on leased property. Need FMV lease. Rules are quite liberal.
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