The IRS released transitional guidance on Qualified Opportunity Zones (QOZs) following recent legislative changes. The guidance addresses how investors and businesses can navigate the rules for gain deferral, property qualifications, and compliance tests after a QOZ’s designation period expires, particularly in light of the One Big Beautiful Bill Act (OBBB). (Notice 2026-40, 6/18/2026; IRB 2026-28, 7/6/2026)
Background
The QOZ incentive, originally created by the Tax Cuts and Jobs Act (TCJA), was designed to encourage long-term investments in low-income urban and rural communities designated as QOZs. The program allows investors to defer and potentially reduce tax on capital gains if they invest those gains into a Qualified Opportunity Fund (QOF), which is a vehicle that invests in eligible QOZ property. The rules governing these investments are detailed in IRC § 1400Z-1 and IRC § 1400Z-2.
On July 4, 2025, the OBBB was enacted, which significantly amended these rules. The new notice provides critical transitional guidance to help taxpayers navigate the changes between the prior law and the new provisions enacted by the OBBB.
Transitional rules for QOZ Investors
The notice clarifies that the rules for deferring gains now differ based on when an investment was made. For taxpayers who deferred gain by making a qualifying investment in a QOF on or before December 31, 2026, that deferred gain must be included in gross income in the tax year that includes December 31, 2026.
However, the OBBB created new rules for investments made on or after January 1, 2027. For these later investments, the tax year for gain inclusion is no longer a fixed date but is instead the year that includes the date five years after the qualifying investment was made. Furthermore, for these investments, the OBBB allows a taxpayer’s basis in the investment to be increased by 10% if the investment is held for at least five years, providing an additional benefit for long-term investors.
Guidance for acquiring property in QOZs
A key part of the guidance addresses the rules for what constitutes qualified opportunity zone business property (QOZBP), especially for property acquired after December 31, 2026. Under the new law, tangible property acquired after this date generally cannot qualify as QOZBP if it is located in a “previously designated QOZ”—that is, a zone designated before the OBBB was enacted.
The notice provides important exceptions to this general rule. First, property can still qualify if it is acquired pursuant to a written working capital safe harbor plan that was adopted on or before December 31, 2026. To be eligible, the business must have received at least 10% of the estimated working capital assets and expended at least 5% of them by the end of 2026.
A second exception allows a QOF or Qualified Opportunity Zone Business (QOZB) to acquire property after 2026 to replace or modernize existing tangible property in the ordinary course of business. The notice clarifies that this does not apply to property acquired to expand a business into a new trade or a new product line.
Compliance after a QOZ designation expires
The original QOZ designations are in effect for 10-year periods, with most set to expire on December 31, 2028 (or December 31, 2027, for zones in Puerto Rico). The notice provides safe harbors that give long-term certainty to businesses operating in these zones.
Even after a zone’s designation expires, a business can continue to treat the location as a QOZ for certain compliance tests through December 31, 2047. This safe harbor applies to the “substantial use” test for tangible property and the compliance tests for a QOZB, such as the requirement to derive at least 50% of its gross income from the active conduct of a trade or business within the zone.
This allows existing investments and businesses to continue operating under the QOZ rules long after the official designation period has ended.
For more on Qualified Opportunity Zones, see Checkpoint’s Federal Tax Coordinator 2d ¶ I-8828.
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