One Door Closes, Another Opens

Interim IRS OZ Guidance

With the transition from the original Opportunity Zone program (OZ 1.0) to the new OZ 2.0 regime fast approaching on January 1, 2027, the IRS recently dropped Notice 2026-40.

Driven by the One Big Beautiful Bill Act (OBBBA), this interim guidance clarifies the rules of the road for the great OZ handoff. For investors and developers, it is a classic "good news, bad news" scenario.

Here is what you need to know to protect your capital and navigate the transition.

The Door Closes: No Re-Deferring Your 2026 Tax Bill

For years, a popular tax-planning hope circulated: when the original OZ 1.0 deferred gains finally trigger on December 31, 2026, could investors simply roll those recognized gains into a new QOF and kick their deferred capital gain tax further down the road?

The IRS has now officially and definitively shut that door.

The Ruling: Capital gains originally deferred under OZ 1.0 that are recognized on December 31, 2026, cannot be reinvested into another QOF for a second round of deferral.

What this means for you:

• A Real Tax Liability: You must prepare to pay the tax on those original deferred gains when filing your 2026 tax return (or extension) in April 2027.
• Active Planning Required: Work with your tax advisor now to explore mitigation strategies—such as tax-loss harvesting, charitable giving, or maximizing passive losses—before the end of the year.
• Your 10-Year Benefit is Safe: Paying the tax bill in 2026 does not kill your long-term benefits. If you keep your money in your current QOF for the required 10-year hold, your eventual exit remains 100% tax-free.

The Door Opens: Bridging OZ 1.0 Tracts into the OZ 2.0 Era

While the IRS closed the door on re-deferrals, they opened a highly anticipated pathway for deploying new capital into existing OZ 1.0 designated tracts.

If you want to invest new capital gains into an existing OZ 1.0 project and still secure the full suite of OZ 2.0 tax benefits, the project must meet three strict requirements by the December 31, 2026, deadline:

• Written WCSH Plan: The project must operate under a valid, written Working Capital Safe Harbor (WCSH) plan adopted on or before December 31, 2026.
• The 10% Capital Test: At least 10% of the project's total estimated working capital must be physically received at the operating business level (the QOZB) by the deadline.
• The 5% Commitment Test: At least 5% of the total estimated working capital must be expended or committed under binding written contracts by the deadline.

If a project fails to clear these three hurdles by December 31, 2026, it will be frozen out of the new post-2026 OZ 2.0 tax benefits that take effect January 1, 2027

The Post-2026 Playbook: A Brand-New 10-Year Cycle

For capital deployed on or after January 1, 2027, we enter the official OZ 2.0 era. The rules of engagement are shifting from a single calendar deadline to a clean, rolling timeline:

Additionally, don't worry if you harvest capital gains late in 2026. The IRS confirmed that pre-2027 gains can still qualify for the OZ 2.0 framework as long as they are deployed within their standard 180-day window, even if that window extends into 2027.  That eligibility window started on July 9, 2026, assuming a January 1, 2027, investment date.

The Bottom Line

The OZ 2.0 rules of the road are settling, and the OZ roadmap is being redrawn. States are currently going through their determination process to nominate new OZ 2.0 designated tracts.  Eligible census tracts are 25% fewer due tighter low-income community determination factors starting in 2027.   

In addition, the window to act on projects in existing OZ 1.0 designated tracts is rapidly closing. Proactive OZ fund sponsors are busy using the next five-months to identify viable OZ 1.0 projects, align safe harbor plans to achieve requisite capital raising and commitment thresholds, and preparing for the OZ 2.0 starting gun on January 1, 2027.

Author: Dylan Gardner and John Heneghan