Does the doubling rule count my land?

The rule you read about is the substantial improvement test, and it's measured against the building alone. Round numbers: you buy for $500,000 and a supportable allocation puts $200,000 on the land and $300,000 on the structure. The test is whether the fund spends more than $300,000 improving that structure, generally inside 30 months of acquiring it. Land basis stays out of the number you have to beat, which is why the test is kinder on a tired building sitting on a valuable lot and harsher on a newish building on a cheap one.

Two terms sit underneath that. A qualified opportunity fund is the entity that holds the investment and self-certifies with the IRS. Your capital gain has to reach that fund within 180 days of when you realized it, and it's gain that qualifies, not ordinary savings. There's also an alternative route called original use, which covers ground-up construction and property that hasn't been placed in service in the zone before, and original use projects don't run the doubling test at all.

Spending past the threshold creates no tax problem. Nothing penalizes you for putting $520,000 into a $300,000 test. The dangerous direction is the other one, a project that stalls and never clears the number inside the window, and how a stall gets treated depends on the specific rules for your fund, so have a CPA who has actually filed these look at your construction schedule before you close.

One thing that surprises people: buying land in a zone and holding it undeveloped doesn't qualify. The improvement or the construction is the point.

I had the 30 months running from certificate of occupancy, which would have been a much more comfortable window. If it runs from acquisition then a nine month permit queue eats a third of it before I own a hammer.

It runs from acquisition, @girder. And the piece harrow should chase is documentation of the land split. On the deals I've read through as a passive, the sponsor either has an appraisal that breaks out land and improvements or they have the county assessor's ratio and a memo explaining why they used it. One of those two is a lot more defensible.

Worth knowing that in the tracts these deals sit in, my subs price differently. Longer drives, no lay-down space, and theft on site. I add ten percent to a bid in those neighborhoods before I look at scope, and that's before anyone mentions a tax code.

Who is actually holding the 30 month calendar on a one-person fund? That's a real question. I've seen operators tracking a five figure tax outcome in a spreadsheet tab they open twice a year.

@lantern the funds I've put money into send a semiannual compliance letter with the asset test date and an improvement spend to date figure. It costs them something to produce and I'd rather pay for it than not have it. A single-member fund with no LPs has nobody asking, which is exactly when the date slides.

Practical version of harrow's question that I needed answered first: how do you confirm an address is in a designated tract at all? I've been using the mapping tool the CDFI Fund publishes and cross checking the tract number on the census geocoder, because a broker telling me "it's in a zone" has been wrong twice on my list.

Add a line for the appraisal, @harrow. A commercial appraisal with a land and improvement breakout has been quoted to me in the $3k to $6k range depending on the property, and you need it before you set the scope, not after.

So if I don't have a realized capital gain sitting anywhere, none of this room applies to me? I've been reading three threads assuming it was a strategy you pick and it sounds more like a thing that happens to be available when you sell something.

@kestrel that's the right reading. Gain first, then geography. And on the land point, raw dirt does work if you build on it, because you're then in original use territory rather than trying to double a building basis that doesn't exist. Holding the dirt and waiting is the version that fails.

Following. I didn't know land was carved out and I've been pricing scopes off the full purchase number all week.

The overage question is the wrong worry, @harrow. My live problem is the opposite shape, cash sitting in the entity while the building department decides things, and that cash is what the asset test looks at twice a year. Spending too much is a bank conversation. Spending too late is a filing conversation.

Slightly embarrassed one: does my own labor count toward the improvement number? I'd be doing framing myself on a small building and it would be a meaningful chunk of the $300k.

@compass I'm fairly sure it's dollars added to basis rather than hours you worked, so your sweat doesn't count and materials you paid for do. Which makes self-performing on one of these actively worse for the test even when it's better for the budget, and that's a strange incentive to sit with.