New OZ Regulations Clarify “Original Use” Test for OZ Real Estate Investments

In its second tranche of proposed regulations issued with respect to federal Opportunity Zones (“OZ”) legislation released last week, the U.S. Department of Treasury ("Treasury") and Internal Revenue Service ("IRS") sought to clarify the imposition of the “original use” requirement on vacant land and existing improvements.
 
Prior to the promulgation of the second tranche of OZ regulations, there had been considerable confusion regarding the treatment of vacant land and improvements located in OZs. The OZ statute provides in part that, in order to qualify as “good” OZ property, the “original use” of the property must commence with the investment by the Qualified OZ Fund or Qualified OZ Business. The second tranche of OZ regulations clears up some confusion on this requirement with respect to vacant land and certain categories of improvements:
 
Vacant Land. The proposed regulations state that vacant land must be used by a Qualified Opportunity Fund or Qualified OZ Business in an active trade or business (and not simply held for investment). 
 
Vacant Buildings. Under the proposed regulations, a property’s history of prior use is disregarded if the property has been vacant for at least five years.
 
Tangible Property. The proposed regulations also provide that, with respect to existing tangible property, the “original use” commences on the “placed in service” date for purposes of depreciation or amortization. 
 
Please contact the Ice Miller team with any questions you have with respect to the application of the “original use” requirements to potential OZ investments or other OZ requirements.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.