Recent IRS guidance sunsets the original Opportunity Zone program two years early, a surprise move forcing investors to reassess projects and meet new year-end planning deadlines, according to tax expert James Montague. Speaking with Checkpoint, he also warned of severe penalties for simple investor compliance errors and discussed the strategic shift as the incentive moves to its permanent “2.0” phase.
‘Early sunset’ a surprise
The one piece of guidance that “surprised people is this early sunsetting of the 1.0 tracks,” said James Montague, director of PwC’s federal real estate tax practice. Prior to the release of Notice 2026-40, guidance and practitioner expectations pointed toward the original Opportunity Zone (O-Zone) designations expiring at the end of 2028. This would have created a two-year overlap with the new, permanent 2.0 tracts, allowing for a smoother transition.
The new notice eliminates that overlap, effectively ending the ability to acquire new property in original zones on December 31, 2026. After that date, new property generally cannot be acquired in an original 1.0 zone unless that specific zone is redesignated under the 2.0 program. This abrupt change “has caused people to reassess and think a little more forward in terms of what can be done today,” Montague explained.
It forces funds and investors that had planned to continue acquiring assets in 1.0 zones through 2028 to accelerate their plans or pivot their strategy entirely, creating a new sense of urgency around projects that were still in development.
A critical year-end planning deadline
The guidance provides a key exception for acquiring property in a 1.0 zone after 2026, but it requires swift and documented action. The exception applies if the property is acquired pursuant to a written working capital safe harbor plan that was adopted on or before December 31, 2026. To be eligible, a business must have received at least 10% of the plan’s assets and expended at least 5% of them by that year-end deadline.
Montague stressed that while there is no formal IRS reporting mechanism for these plans, they must be concrete, written documents held in the company’s files for potential audit. He warned it “is not something that we would suggest people go ahead and backdate or figure out sometime in 2027.”
The plan must be in place before the end of the year. This creates a timing crunch, as Montague noted Treasury has indicated the new 2.0 zone designations may not be finalized until as late as December 28, 2026, potentially giving investors only days to confirm their plans if a 1.0 zone is not redesignated.
Compliance ‘footfalls’ put investments at risk
Beyond the transition, Montague flagged recurring compliance “footfalls” for individual investors that can jeopardize their investments. While qualified funds are generally compliant with their own Form 8996, Qualified Opportunity Fund, filings, individual investors must separately file Form 8997, Initial and Annual Statement of Qualified Opportunity Fund (QOF) Investments, each year to report their gain deferral and any later changes. Montague said he has seen investors miss the 8997 because of simple oversights, such as switching tax providers.
The consequences of this failure are severe. “It may be treated as a deemed inclusion, and your investment is just done,” Montague said, resulting in the immediate recognition of the original deferred gain. Correcting the error is a burdensome “administrative process” that requires amending returns and potentially reopening statutes of limitation.
He said practitioners hope Treasury will offer a more streamlined way to cure these good-faith errors, because as it stands, the current process “is putting undue pressure on taxpayers that are otherwise satisfying the intent of the program.”
Outlook for the 2.0 program
Looking ahead, Montague said the “main thing for investors to do is to start looking at where they may have eligible gains today.” Gains realized in late 2026 may have a 180-day investment window that extends into 2027, allowing them to be rolled into new 2.0 funds. However, he emphasized that investors cannot move cash into the new funds until 2027.
The permanency of the 2.0 program may also cause states to rethink their conformity. Montague noted that states like California, which fully decoupled from the temporary 1.0 program, may reassess their position. “Now that it’s going to be permanent, it’s going to be an assessment of how will this impact state budgets,” he said.
From a fund perspective, firms are already strategizing about new products, with increased interest in asset classes like renewables and investments in rural areas, which receive enhanced benefits under the new law.
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