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Why must the “substantial improvement” test be applied on an asset-by-asset basis, rather than on an aggregate basis?

How will this impact the relocation or purchase of an operating business into an OZ?


Answers
  • Matthew Rappaport
    October 10, 2019

    The asset-by-asset approach shouldn't affect relocations of an existing operating business. In fact, I doubt it affects operating businesses at all, unless those businesses also have real estate. The problematic part is large real estate projects. For instance, suppose I purchase a parcel with land and an existing building. Without touching the existing building, I construct two more buildings of equal size and value on different sections of the parcel. Even if I back out the land as per the revenue ruling on the subject, I theoretically have 2/3 good assets and 1/3 bad assets, which fails my requirement that my QOZB have at least 70% of its assets be QOZBP. The IRS has certainly received comments on this (including mine), but how they respond remains to be seen.

  • Maria De Los Angeles Rivera
    October 11, 2019

    The second set of regulations, so you can stipulate. Nevertheless, the IRS requested comments. The impact will be on the 70% compliance of Qualified Opportunity Zone Business Property for the business.

  • Marc Schultz
    October 08, 2019

    The preamble to the proposed regulations state that this analysis is done on an asset-by-asset basis. This could change in the final regulations.

  • Matt Campbell
    October 08, 2019

    The proposed Treasury regulations require the substantial improvement to be applied on an asset-by-asset basis. Those are the rules we have to deal with. I believe there will be taxpayer friendly rules finalized for "new use" property within a zone such that used property used elsewhere new to the zone will qualify for benefits.

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