What Real Estate Projects are Eligible for OZ Investments?
The key IRS requirement for real estate investments in OZs relates to land and building ownership and use.
When an OZ investor invests in real estate (as opposed to other eligible business activities), the property must be a “Qualified Opportunity Zone (QOZ) business property.” This means it must meet the following IRS requirements:
- The property is used in a trade or business of the QOF or in a QOZ business.
- The property was purchased after December 31, 2017.
- The original use of the property in the QOZ commenced with the QOF or QOZ business OR the property was substantially improved by the QOF or QOZ business.
- During substantially all of the time the QOF or QOZ business held the property, substantially all of the use of the property was in a QOZ.
If an investor invests in properties located in the OZ that do not meet this definition, the investment is not eligible for the tax benefits of the OZ.
In simpler terms, the IRS permits OZ investments in new construction of a new building in an OZ because it is an original use (no investment existed before).
New construction improvements or rehabilitation qualifies as an existing tangible property that requires an additional investment. In addition to the requirements above, the QOF must substantially improve the property within 30 months of acquisition of the property. A property is "substantially improved" if the amount of the tax basis is doubled from the date the property was acquired.