How are cash and intangible property considered when it comes to this test?
The only "good" assets for purpose of the 90% test are investments in a QOZB structured as a partnership or corporation or direct investment into QOZBP. Cash and intangibles fall outside of this definition and must be part of the 10% to avoid penalty.
For QOFs holding cash and intangible property directly, there are technical issues because the working capital safe harbor and intangible property allowance are only for QOZBs and not QOFs. You might have to rely on reasonable cause, depending on how much of each asset was in the QOF.
Assuming the QOZB is done by a subsidiary entity, which is the norm, cash and intangibles are part of the 10% of other property the QOF is allowed to have, not counted toward the 90%.
The fund must use one of the following methods. One, if the fund has an applicable financial statement, valuation made using applicable financial statements. Two, if the fund does not have an applicable financial statement, cost of the asset. Cash and cash equivalents are not considered QOZP, but the regulations have several safe harbors rules in the case of recent contributions and dispositions.
To satisfy the 90% test, newly acquired assets must be significantly improved. Significant improvement is 100% of the value of an asset acquired, excluding land. Leased property does not need to be improved. Here is an example. On March 1, 2018, a purchase is made for $500,000. The land is $150,000 and the building is $350,000. An adjoining building and its land are leased and are valued under GAAP as $250,000. Prior to improvements, neither the building nor the land qualify upon purchase under the original use test. Only the lease of $250,000 is a qualified asset. Only 33% of assets are qualified. After purchase an additional $500,000 is deployed to improve the building. The building has been improved by more than 100%. The building is now valued at $850,000. Since the building has been improved by more than 100%, the building and land are both converted to Opportunity Zone assets. Opportunity assets are now 100% of the fund and the $1,000,000 of opportunity assets are valued as follows: The land $150,000. Original purchase of building $350,000. Building improvements $500,000. Value of leased property $250,000. Total Opportunity Zone assets $1,250,000.
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