Technically no, however, there is a way to pull that off
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How strict are the rules on a property having been vacant for the purposes of defining it as an "Original Use Property”?
If I have a multi-story building where the upper floors have been vacant for a decade, but where the ground-floor retail space remains in use, does it count as an original use property?
Answers
Probably not, honestly. The property likely needs to be completely vacant for five years, according to the regulations. The foregoing is general information and not legal or tax advice.
I do not believe that the IRS has provided specific guidance on this.
No. I believe you would be taking an audit lottery approach if you attempted to consider vacant. You can look to lease the property into the opportunity zone fund. That will reduce your cash outlay. Call (918) 594-0819 if you would like to open engagement on how to structure into the benefits.
It is not entirely clear whether the ground floor space will disqualify the rest of the building, but as long as the upper floors can be newly placed in service, those floors should be able to meet the original use test. Then you have to see if you have enough qualifying property to meet the 70% tangible property requirement (assuming the property is in a QOZB), since the ground floor definitely will not be QOZBP.
The second set of regulations introduced the vacant property term. The Treasury Department and the IRS are proposing that where a building or other structure has been vacant for at least five years prior to being purchased by a QOF or qualified opportunity zone business, the purchased building or structure will satisfy the original use requirement. In your case, part of the building has been vacant for 10 years. You might want to research the possibility of splitting the property and see if that will satisfy the test. In addition, the proposed regulations clarify that used tangible property will satisfy the original use requirement with respect to a qualified opportunity zone so long as the property has not been previously used (that is, has not previously been used within that qualified opportunity zone in a manner that would have allowed it to depreciated or amortized) by any taxpayer. Therefore, the retail space will not satisfy the original use, unless substantial improvement is made.
Based on the Tranche II Regulations issued in April this is a strict 5-Year vacancy rule and your scenario would not meet the requirement. Recent hearings in July included suggested modification for the 5-year rule from several commentators, but we will need to see how the final regulations deal with your fact pattern.
I have not seen any detailed guidance in the proposed regulations that cover this situation. But if I were advising my client, I would suggest that you could apply a percentage to the portion of the building that has been vacant for 10-years to qualify as original use. GUY A. NICIO, CPA, MST | PARTNER 111 West Ocean Boulevard, Twenty-Second Floor Long Beach, CA 90802 P: 562.435.1191 | F: 562.495.8265 gnicio@windes.com | www.windes.com Long Beach | Irvine | Los Angeles Link to access Send This File site: https://www.sendthisfile.com/windes
It must be remembered that in this, and in so many things "Opportunity Zone," the rules are sparse. There's precious little defining what is "vacant." The regulations for opportunity zones say: "For purposes of this paragraph (c)(4)(i)(B)(6), if property has been unused or vacant for an uninterrupted period of at least 5 years, original use in the zone commences on the date after that period when any person first uses or places the property in service in the qualified opportunity zone within the meaning of the preceding sentence." In the somewhat similar area of Section 1394 "empowerment zones," here's what the regulations say: "For purposes of section 1394, if the property is vacant for at least a one-year period including the date of zone designation, use prior to that period is disregarded for purposes of determining original use. For this purpose, de minimis incidental uses of the property, such as renting the side of a building for a billboard, are disregarded." With all of this in mind, I'd say that the use of the building has to be truly "minimal" for the building to qualify as "vacant" under this test. Having ground-floor retail seems unlikely to meet that standard, leading me to conclude that your building is unlikely to be considered vacant.
In answer to your question, it is unlikely that the upstairs vacancy would disqualify the entire property, but additional research would be required to give you a definitive answer.
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