It includes most expenses. Hard costs, soft costs, pretty much anything that can be capitalized into basis.
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How much time do I have to make substantial improvements to my OZ property after purchase?
Are there any requirements on what "substantial" must include?
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As an initial matter, keep in mind that you don't need to make substantial improvements to your property if its original use in the opportunity zone began with or after its purchase. For this purpose, certain vacant properties and brownfield sites may be treated as meeting this requirement. If in fact your property doesn't meet the "original use" test, and you need to substantially improve it, then the deadline for "substantial improvement" is not a fixed period from the date of purchase but a sliding window of 30 months. The tax regulations require that "during any 30-month period beginning after the date of acquisition of such property, additions to basis with respect to such property . . . exceed an amount equal to the adjusted basis of such property at the beginning of such 30-month period . . .” Note that this provision refers to “any” 30-month period (and not just the 30-month period that begins on the date of purchase). This means that you pick any point in time as your starting point (time A) and then test whether the amounts that you’ve added to basis over the next 30 months exceed the property’s basis at time A. Consider the following example: a QOF buys a building for $1 million in Month 0, makes $300,000 of improvements to the building in Month 6 and another $1.4 million of improvements in Month 36. If the QOF uses a testing period that begins on the acquisition date (or even as late as Month 5), the test won’t be satisfied because only $300,000 of improvements are made within the subsequent 30 months. If the QOF starts the period in Month 6, the tax basis for testing purposes becomes $1.3 million (i.e., the $300,000 improvement raises the bar), but the applicable 30-month period now reaches the additional $1.4 million of improvements in Month 36. Presumably, there must be an intent existing at the onset to meet this test, because QOF/QOZB qualification is relevant well before 30 months are up (even if it starts on the purchase date). If substantial improvement is not achieved (or at least commenced) within some reasonable time-frame, the IRS may question whether such an intent ever existed.
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