The Treasury Department and Internal Revenue Service (IRS) issued final regulations implementing the Opportunity Zone (OZ) incentive on Dec. 18. OZs, which were created by the Tax Cuts and Jobs Act of 2017, offer capital gains tax relief for investments in economically distressed areas across the United States.The regulations and covering analysis included 544 pages, but here are eight key takeaways after the initial review.
1. The “No Tax After 10 Years” Rule. 
The regulations finally permit all of the following to qualify for no tax after 10 years treatment:
> sales of a Qualified Opportunity Fund (QOF) interest held by an investor
> sales of a property, partnership, LLC, or stock investment held by a QOF
> and sales of a property held by a partnership, LLC, or corporation in which the QOF invests.
Note also that the new rule appears to allow the sale of any asset held by the QOF or Qualified Opportunity Zone Business (QOZB), even property that constitutes the 10% (at the QOF level) or 30% (at the QOZB level) “bad assets” to be eligible.
Remember that this does not change the tax rules for sales of property during the 10-year period. The favorable tax treatment does not kick in until the 10-year period has elapsed.
2. Measuring the 180-Day Period for Sales of Property Used in a Trade or Business. When it comes to determining when and how much can be invested in a QOF, the rules for capital gains that arise from the sale of property used in a trade or business have been conformed to the rules that apply to sales of portfolio assets (like stock).
Now, for example, an investor can invest the amount of capital gains from the sale of rental real estate, without having to net this amount against later losses (if any) from other similar sales, and the 180-day period runs from the date of that sale, not the end of the year.
This is an important change.
People have been poised to make their investments from 1231 sales precisely on Dec. 31, and this is no longer necessary.
On the other hand, if you had a 1231 gain in the first half of 2019 (so that the 180-day period has already run from the date of sale), you can elect to apply the proposed regulations and still start the period on Dec. 31, 2019.
There are complications; be sure to consult a professional if this is an issue for you.
3. Installment Sales. 
When it comes to determining the 180-day period for capital gains arising from an installment sale (essentially a sale with multiple payments), the IRS made clear that installment sales can either recognize and measure the 180-day period all in the year of sale or make investments over the years that the gain is recognized.
4. Investing in the QOF That You Sell to. 
In general, investors cannot qualify for OZ benefits by selling an asset to a QOF and then using that gain to invest in the same QOF (even if they take a less than 20% interest in the QOF). Again, this is one to review with a professional.
5. The 100% Substantial Improvement Rule. 
The substantial improvement rules, which require a QOF or QOZB to spend as much or more than their basis on improvements, now permit an investor to improve its buildings using the “aggregate” method.
There are still limitations.
In general, the other property must be used in the same trade or business.
> For example, rehabilitating a second rental housing building next to the first rental housing building can count, but rehabilitating a hotel next to the used rental housing building will not.
> The regulations also contemplate aggregating improvements to several properties that together constitute a campus for a business.
> The rules also change how long a building has to be vacant in order to avoid the need for substantial rehabilitation.
The requirement was five years in the proposed regulations, but the final regulations shorten this to one year of vacancy if the property was vacant at the time the census tract was designated an OZ, and otherwise three years.
6. How Much Do You Have to Improve Land? 
The IRS has adopted a “you know it when you see it” requirement for making more than an “insubstantial improvement” to land.
It specifically declined to adopt a minimum percentage test and indicated that adding an irrigation system to farm land or grading land would not be “insubstantial.”
In other words, the IRS seems to be saying that mere grading of land would be sufficient. This is surprising, since grading land is not sufficient in other contexts. For example, it does not constitute “physical work” for purposes of the “begun construction” test that applies to renewable energy tax credits.
7. Interaction with Tax Credits. 
Speaking of tax credits, the IRS generally declined to provide any guidance about how tax credits and OZs might play well together.

For example, on behalf of the ABA Forum, we wrote a comment suggesting that the IRS allow the lower rehabilitation requirement that applies under the low-income housing tax credit code provision (20%) than the one in the OZ provision (100%), but the IRS declined to adopt that view.
In general, the IRS stated a few times that it is continuing to consider the interaction of the OZ rules with the tax credit rules.
> Another notable change allows one member of a consolidated group to invest the gain generated by another member.
This is important to any corporation that makes its tax credit investments through one subsidiary but wants to use the capital gains generated elsewhere in the consolidated group.
8. 31-Month Written Plans. 
The 31-month written plan rule got a great deal of attention in previous rounds of the regulations.

The IRS now has stated that a QOZB may choose to apply subsequent 31-month working capital safe harbors for a maximum 62-month period, provided that each 31-month period satisfies the requirements for applying a 31-month working capital safe harbor.
The rules require the subsequent infusions of working capital must form an integral part of the plan covered by the initial 31-month working capital safe harbor.
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