What counts as a “substantial” improvement in an Opportunity Zone project?

Answers

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  Adam Yormack

  Escalante Yormack (EY) Law, PLLC

  April 09, 2019

  In this case, substantial improvement means 50% of the value of the property. However, substantial improvement is applied differently when applied to other kinds of "projects," such as pure land development or starting a new business. What "project" did you have in mind? Again, the criteria can change depending on what you're doing. For real estate, if you're buying then renovating, for example, you'll want to be sure you hit the 50% mark. Regarding the 30-month timeframe, there is a penalty regime.

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  Matthew Peurach

  Morris, Manning, & Martin, LLP

  April 09, 2019

  In order to be considered to have "substantially improved" tangible property, you need to effectively double your cost basis over a 30-month period. For example, if you purchase property for $1 million, you need to put in $1,000,001 in improvements over the 30-month window. The 30-month window commences with acquisition of the property (note, however, there is some ambiguity here and a position could be taken that the taxpayer can choose when to begin the 30-month period after acquisition of the property, but the conservative interpretation is to begin the date of acquisition). Importantly, you just need to have put in new improvements to the property that are at least double the original cost basis of the property, which means that the improved property does not necessarily need to be complete or placed in service within 30 months.

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  Valerie Grunduski

  Plante & Moran, PLLC

  April 16, 2019

  Substantial improvement is defined as doubling the basis of the property on day 1 of the 30-month period. The proposed regulations and related guidance allow a taxpayer to back out the value attributable to the land when determining substantial rehab for the affixed property. Unfortunately, not substantially improving the property causes it to be a "bad asset" for purposes of the 70% and 90% tests. This would result in penalties being assessed.

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  Blake Christian

  HCVT CPAs

  April 16, 2019

  Substantial Improvement rule applies to improved real estate. If the investor is not the original user, then the investor/fund must make improvements within 30 months that equal the original cost basis in the buildings (land is not included).

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  Blake Christian

  HCVT CPAs

  April 16, 2019

  If the fund does not meet the reinvestment timeline, there is a risk that the property will not qualify as OZ property and the fund can incur a 6 annualized penalty and potentially lose it’s tax advantage status over time.

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  Peter McNeil

  Comprehensive Financial Solutions and Tax

  April 28, 2019

  Substantial improvement is doing $1 more than the value of tangle property. Here is an example. A property is purchased for $1 million. There is building and equipment worth $600,000 and land of $400,000. You only need to do improvements of $600,001.

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  Phil Jelsma

  Crosbie Gliner Schiffman Southard & Swanson (CGS3)

  April 28, 2019

  Whatever amount you allocate to the buildings and improvements at purchase are substantial improvements.

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  Ed Mofrad

  Mofrad Financial Solutions

  April 28, 2019

  Substantial improvement is anything beyond ordinary repair for normal wear and tear. For instance, if you change a door knob, it is repair. If you change all the doors in a property, that is substantial improvement.

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