Recent Developments Observations: Qualified Opportunity Zones: The Good, the Better and the Not So Bad

The tax benefits offered by an investment in a QOF are threefold: (1) investors can defer recognized capital gains from other sources until the earlier of (a) the disposition of the QOF interest or (b) December 31, 2026, so long as such gains are invested within a 180-day investment period and the taxpayer makes a gain-deferral election; (2) investors that hold their QOF investment for five and seven years receive a tax basis step-up equal to 10 percent of the deferred gain and an additional five percent of the deferred gain, respectively; and (3) investors who maintain their investment in the QOF for at least 10 years (the "10-Year Period") receive a basis step-up to the fair market value of the investment on the sale or exchange date.2 On October 19, 2018, Treasury and the IRS issued the first set of Proposed Regulations and other guidance regarding O-Zones (the "October Proposed Regulations").3 The October Proposed Regulations were amended and expanded by the April Proposed Regulations. "13 Whether a lease is market rate is determined under the Treasury Regulations for Code Sec. 482 and includes consideration of whether the terms of the lease "reflect common, armslength market practice" in the location that includes the O-Zone.14 While purchased tangible property must be acquired from an unrelated person, the April Proposed Regulations allow leased tangible property to be acquired from a related party to the QOF or the O-Zone Business, suujecc to certain requirements.15 First, if che lessor and lessee are related, the QOF or the O-Zone Business cannot prepay its lease payments beyond 12 months in advance.16 Additionally, if the lessor and lessee are related and the lease relates to personal property, then either (1) the property must have its "original use" in an O-Zone begin with the QOF or O-Zone Business (as explained below) or (2) the QOF or O-Zone Business must become the owner of tangible personal property that has a value not less than the value of the leased personal property.17 If the lessee is required to purchase tangible property, the acquisition of such property must occur during the period that begins on the date the lessee receives possession of the leased property and ends on the earlier of either (1) the day that is 30 months later or (2) the last day of the lease.18 Moreover, there must be substantial overlap of zones in which the QOF or O-Zone Business uses the acquired property and leased property.19 For purposes of leased property,