IRS Sets Year-End Deadline for Opportunity Zone Investors

Full analysis

The IRS released Notice 2026-40 on June 18, providing transitional rules for qualified opportunity zone (QOZ) investments — a tax program that lets investors defer or reduce capital gains taxes by placing gains into designated economically distressed areas. The critical near-term deadline: any capital gains deferred under the original 2017 program must be recognized as income by Dec. 31, 2026, and investors cannot re-defer that recognized gain under the new program unless they deliberately trigger what the IRS calls an 'inclusion event' — such as gifting a fund interest — before that date, and then reinvest within 180 days.

For gains invested in a qualified opportunity fund (QOF — a vehicle that pools money for QOZ projects) after Jan. 1, 2027, the rules shift: deferred gain is recognized at the earlier of a sale, another triggering event, or five years from the investment date, with a 10% basis increase (or 30% for rural opportunity funds) if held the full five years. The IRS also extended transition relief for existing QOZ businesses and their property through Dec. 31, 2047 in certain cases. Investors and fund sponsors are urged to review existing investments and any working capital plans before year's end, because most transition relief depends on actions taken on or before Dec. 31, 2026.