Existing Opportunity Zone Investors Must Evaluate Planning Opportunities Before Dec. 31, 2026

Who Should Read This? Anyone who deferred capital gain by investing in a Qualified Opportunity Fund (“QOF”) under the original Opportunity Zone program (“QOZ 1.0”) and would like to explore whether additional deferral may be available under the new Opportunity Zone regime.

The IRS recently issued Notice 2026-40, providing transition guidance under the One Big Beautiful Bill Act (“OBBBA”). The guidance confirms that Dec. 31, 2026 remains the mandatory recognition date for deferred gain under the original Opportunity Zone program, but it also identifies a planning opportunity that may allow certain investors to continue deferring gain under the new Opportunity Zone regime (“QOZ 2.0”).

Dec. 31, 2026 Is a Mandatory Recognition Date

Unless an earlier inclusion event occurs, investors who continue to hold a qualifying QOF investment through Dec. 31, 2026 will be required to recognize their remaining deferred gain in the taxable year that includes that date. This mandatory recognition occurs automatically by operation of law. Notice 2026-40 also confirms an important limitation: gain recognized solely because of the mandatory Dec. 31, 2026 inclusion date is not treated as new eligible gain and therefore cannot be reinvested into a new Qualified Opportunity Fund under QOZ 2.0.

A Potential Planning Opportunity Before Year End to Avoid Recognition Event

The benefit of early planning is reinvestment flexibility. Gain recognized as a result of an inclusion event may itself constitute eligible gain for a new deferral election under Section 1400Z-2(a), provided the investor makes a qualifying investment within the applicable 180-day investment period and satisfies the remaining statutory requirements. In appropriate circumstances, this may allow an investor to reinvest into a QOZ 2.0 fund beginning Jan. 1, 2027 and potentially benefit from the new rolling five year deferral period together with the new 10% basis increase (or 30% for a Qualified Rural Opportunity Fund).

Whether a particular transaction constitutes an inclusion event depends on the applicable regulations and the investor’s specific facts. Transactions that may warrant consideration include gifts or transmutations, certain changes in trust ownership or grantor trust status, and a sale or exchange of all or a portion of the qualifying investment. Additionally, this strategy is not appropriate for every investor because it generally restarts the 10-year holding period for purposes of excluding future appreciation. Investors should weigh that tradeoff against the benefit of an additional five-year deferral under QOZ 2.0.

Transition Relief for Existing Opportunity Zone Projects

Notice 2026-40 also provides welcome transition relief for existing Opportunity Zone projects. Qualified Opportunity Zone Businesses operating pursuant to a written working capital safe harbor plan adopted on or before Dec. 31, 2026 may continue to acquire qualifying property after that date if the applicable transition requirements are satisfied. This relief is intended to allow projects that are already underway to continue without losing Opportunity Zone status as the program transitions to QOZ 2.0.

Next Steps

The interaction between the mandatory Dec. 31, 2026 recognition date, the inclusion event rules, and the new Opportunity Zone regime creates planning opportunities that are highly fact specific. Existing Opportunity Zone investors should review their investment structure well before year end to determine whether any pre-2027 planning opportunities are available.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.