Today, the IRS released highly anticipated guidance on Opportunity Zones. Proposed regulations (REG-115420-18) outline the requirements that investors must satisfy to defer the taxation of capital gains invested in a qualified opportunity fund (QOF), as well as the requirements for qualifying and self-certifying as a QOF. The regulations also provide guidance on determining whether a purchased building in an Opportunity Zone satisfies the "substantial improvement" requirement under Section 1400Z-2(d)(2)(D)(i)(II) and 1400Z-2(d)(2)(D)(ii).

Revenue Ruling 2018-29, released simultaneously with the regulations, addresses the "original use" requirement in Section 1400Z-2(d)(2)(D)(i)(II) and the substantial improvement requirement. It concludes that:

• The original use of an existing building within a qualified Opportunity Zone (QOZ) does not begin under Section 1400Z-2(d)(2)(D)(i) with a QOF's purchase of the building
• The requirements for original use of tangible property in the QOZ do not apply to the land on which the building sits
• QOFs must measure substantial improvements to buildings they purchase within a QOZ based on their additions to the building's adjusted basis, but are not required to substantially improve the land on which the building sits

A Tax Alert on the regulations and revenue ruling is forthcoming. Details about an upcoming webcast on the guidance will be announced shortly.