Helping Investors and QOFs Plan for Qualified Opportunity Zone Transitions by Alex Keneiby, CPA
Posted on August 10, 2026
by
Alex Keneiby
On June 18, 2026, the IRS issued guidance on the pending tax deferral deadline for the original Qualified Opportunity Zone (QOZ 1.0) program under the Tax Cuts and Jobs Act (TCJA) and the program changes introduced in 2025 by the One Big Beautiful Bill (OBBBA), which is commonly referred to as QOZ 2.0. Taxpayers, including existing and future QOZ investors, qualified opportunity funds (QOFs) holding qualifying property, and qualified opportunity zone businesses (QOZBs), should take the time now to review the proposed regulatory changes and prepare for the risks and opportunities that lie ahead during this transition.
Background
Congress introduced the QOZ 1.0 program in 2017 to incentivize private investment and generate job creation in economically distressed, low-income communities (LICs) throughout the U.S. and U.S. territories. Under the program, individuals and businesses that reinvest qualifying capital gains into a QOF holding QOZ 1.0 property used in a trade or business (including qualified opportunity zone stock, business property and partnership interest) may defer federal tax on those gains until Dec. 31, 2026, and receive a step-up in the basis of those investments held for 10 years, effectively eliminating federal income tax on their investments’ appreciation.
The OBBBA makes the QOZ program a permanent fixture of the tax code (QOZ 2.0) but amends many of its original provisions, including narrowing the definition of an LIC beginning on Jan. 1, 2027, establishing a new, five-year rolling period for capital gain tax deferral and extending the potential gain exclusion to 30 years.
Both QOFs and individual investors in the QOZ 1.0 program currently face a unique transition period as the initial program phases out and the new provisions under QOZ 2.0 commence. More specifically, planning must address the fact that both QOZ 1.0 and QOZ 2.0 zones will be in effect for calendar years 2027 and 2028.
Transition Planning for Existing Investors
IRS Notice 2026-40 reaffirms that taxpayers holding a QOF investment under the QOZ 1.0 program on Dec. 31, 2026, must recognize any remaining deferred gain as taxable income for the taxable year that includes Dec. 31, 2026. They may not roll over this “deemed included gain” into another QOF.
Despite this pending tax bill at the end of this year, investors who continue to hold their original QOF 1.0 investment for 10 years may still be eligible to adjust the investment’s basis to its fair market value upon a later sale or exchange, essentially eliminating a decade of appreciation on their original QOF investment.
This is not the case when a taxpayer sells, transfers or restructures an existing QOZ 1.0 investment before Dec. 31, 2026. Under these circumstances, the taxpayer may defer the gain otherwise recognized by the triggering inclusion event for five years by investing it in another qualifying investment under the new QOZ regime within 180 days of the inclusion event date. However, the triggering event nullifies the original investment’s eligibility for a 10-year basis step-up.
By contrast, taxpayers with capital gains to invest in a QOF under the QOZ 2.0 framework on or after Jan. 1, 2027, may receive the following benefits:
- up to a five-year deferral of tax on capital gain; and
- a 10 percent basis step-up to the original gain or QOZ 2.0 investments held for at least five years, or a 30 percent basis step-up to the original gain for QOZ 2.0 investments in rural areas.
Transition Planning for QOFs and QOZB
Generally, opportunity zones designated under QOZ 1.0 remain valid through Dec. 31, 2028, whereas those designated under QOZ 2.0 will be in effect and ready for investment starting on Jan.1, 2027, through Dec. 31, 2036, with new zones designated every subsequent 10 years.
Tangible property QOFs and QOZBs acquire in previously designated QOZs after Dec. 31, 2026, may continue to qualify as QOZBP when the following criteria are met:
- the QOZB must adopt a written working capital plan on or before December 31, 2026;
- the QOZB must acquire the property in a manner “substantially consistent” with that working capital plan;
- the QOZB must receive at least 10 percent of its total estimated working capital assets designated in writing pursuant to the plan by December 31, 2026; and
- the QOZB must expend at least 5 percent of its total estimated working capital assets by December 31, 2026.
Separately, the guidance clarifies that tangible property acquired by QOFs and QOZBs in an expired QOZ after Dec. 31, 2026, to replace or modernize existing tangible business property used in the ordinary course of its trade or business will continue to qualify as QOZBP. This is not the case for property acquired in an expired QOZ to expand or transition a trade or business.
With this guidance in mind, it behooves opportunity zone investors, QOFs and QOZBs to review all of their existing and pending QOZ projects to determine the best course of action through the coming transition period and prepare for stricter reporting requirements under QOZ 2.0.
About the Author: Alex Keneiby, CPA, is a director of Tax Services with Baker Tilly x Berkowitz Pollack Brant, where he provides tax planning, compliance and consulting services to high-net-worth individuals, real estate developers and entrepreneurs. He can be reached at the CPA firm’s Miami office at (305) 379-2000 or info@bpbcpa.com.
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