Original Use refers to the first time a particular property is put into service in a Qualified Opportunity Zone (QOZ) for purposes of generating income. This concept is crucial to understanding the incentives provided by the Opportunity Zones program.
To benefit from the QOZ tax advantages, investments often have to either originate the use of a property in a QOZ or substantially improve an existing property. Here’s a breakdown:
- Original Use: If a QOF purchases a new property that has never been used before in a QOZ, the property would meet the Original Use requirement. The property starts its original use with the QOF when it’s placed into service in the QOZ for the purpose of depreciation (or amortization) for tax purposes.
- Substantial Improvement: If a property was previously in use within a QOZ, then a QOF can still benefit if it substantially improves that property. Essentially, the QOF must invest an additional amount equal to or greater than the initial purchase price of the property (excluding the value of land) over a set period, typically 30 months.
Understanding Original Use is pivotal for investors and fund managers seeking to maximize the benefits of investing in QOZs, as this determines the eligibility of a property for tax advantages under the Opportunity Zones program.