The term original use refers to the initial use or placement into service of a property in a manner that qualifies it for tax benefits under these investment strategies. Here’s how it applies to each of these services:
1. 1031 Exchange
- Original Use: In a 1031 exchange, “original use” generally isn’t a primary concern. The focus is more on the concept of “like-kind” property, which allows real estate investors to defer capital gains taxes by exchanging one investment property for another. However, if the property involved in the exchange has been newly constructed or significantly improved, it might be considered as having its “original use” by the taxpayer when it is first placed in service after the construction or improvement.
2. Qualified Opportunity Fund (QOF)
- Original Use: The term is crucial in the context of a QOF. To qualify for the tax benefits associated with investing in a QOF, the property must either:
- Have its “original use” begin with the QOF, meaning that the property was never used or placed into service by any taxpayer before the QOF acquired it, or
- Undergo substantial improvement if the property was previously used.
- For instance, if a QOF purchases a piece of land and develops it, the original use of the property begins with the QOF. If a QOF buys an existing building, the QOF must significantly improve it (typically by investing an amount equal to the property’s purchase price into improvements) for it to qualify.
Understanding the concept of original use helps ensure that investments meet the eligibility criteria for the intended tax benefits under these programs.