Opportunity Zone updates: New proposed regulations clarify transition rules
Opportunity Zones are entering a major transition period.
Recent law changes, including the One Big Beautiful Bill Act (OBBB), have adjusted how the program will work going forward. Now, IRS Notice 2026-40 has provided the IRS’s “roadmap” for the handoff between the old system and the new system.
The guidance not only clarifies how existing investments will be treated during the transition but also highlights key planning considerations for investors preparing for the next phase of the Opportunity Zone program.
What is the current status of Opportunity Zones?
Opportunity Zones are currently in a transition period as the original program approaches key deadlines and a revised framework is set to take effect on January 1, 2027.
Investors with existing Opportunity Zone investments usually remain subject to the original rules, including the upcoming recognition of deferred gains, while a new set of tax-deferral, Opportunity Zone tracts and basis-adjustment provisions will govern future investments.
What Notice 2026-40 means for Opportunity Zone investments
Notice 2026-40 outlines transitional guidance for investments made under the original program before the new Opportunity Zone rules take effect. Note that this is a notice to the proposed regulations and additional guidance will follow once those are released.
Here are three key areas the notice addresses:
Investments made on or before December 31, 2026.
Under the old rules, investors could reinvest eligible profits into a qualified opportunity fund and delay tax — but only up to a point. The notice reiterates that, for many investors, the deferred profit must typically be reported as taxable income no later than the year that includes December 31, 2026.
The notice also reiterates that this cannot be deferred any further. However, Opportunity Zone gains recognized by an inclusion event may be eligible for deferral.
Investments made on or after January 1, 2027.
Starting January 1, 2027, the program continues but works differently. Instead of one shared end date, the new rules generally make the deferred gain taxable at the earlier of when the investment is sold or five years after the investment was made.
If the investment is held for at least five years, the rules can provide an additional benefit by increasing the investor’s basis for the investment, typically 10% or 30% for certain qualified rural opportunity fund investments.
Property acquired after December 31, 2026, in previously designated Opportunity Zone tracts.
The notice signals that forthcoming proposed regulations will include safe harbors permitting Qualified Opportunity Funds (QOF) and QOZBs to keep satisfying location-based tests after a previously designated qualified Opportunity Zone’s (QOZ) designation expires.
Projects already operating under a written working-capital plan adopted by December 31, 2026, may be able to treat certain post-2026 purchases as still qualifying if they are made under that plan and meet the notice’s conditions. Generally, the notice requires that 10% be funded to the Qualified Opportunity Zone Business (QOZB) and 5% spent by December 31, 2026. Ordinary business course replacement or modernization may still qualify, but this may not extend to expansion into a new business line or new product line.
If tangible property is acquired by the end of the QOZ designation period or qualifies under the working capital or ordinary course replacement transition rules, the QOF or QOZB can keep treating the expired QOZ as a QOZ for the substantial use test through December 31, 2047.
What the changes mean for your Opportunity Zone investment
As Opportunity Zones transition into this next phase, the rules clearly shift from a one-time deferral incentive to a more measured, rolling framework. For investors, this means 2026 serves as a hard reset on existing deferrals, while shorter, investment-specific timelines will govern new investments.
At the same time, the guidance preserves value for ongoing projects by allowing certain pipeline developments and operational replacements to continue qualifying, even as legacy zones phase out.
How you can prepare for Opportunity Zone changes
Now is the time to start thinking about how these transition rules affect your current QOF and QOZB investments. Whether you’re managing an existing investment, overseeing an active development project or evaluating future opportunities, the transition guidance introduces several planning considerations:
- Know your potential tax liability: Investors with gains deferred under the original Opportunity Zone program should begin planning for the tax implications of the December 31, 2026, inclusion date. Understanding the potential tax liability now can help avoid cash-flow surprises and provide time to evaluate strategies for funding the resulting tax obligation.
- Review current projects: Organizations with active Opportunity Zone projects should review existing working capital plans, development timelines and planned property acquisitions. Projects that may rely on the transition relief provisions should confirm they meet the notice’s requirements and maintain documentation supporting continued eligibility.
- Reassess new investments: For those considering new Opportunity Zone investments after January 1, 2027, it will be important to reassess investment horizons and expected returns under the revised five-year deferral framework. The new rules may create different planning opportunities than the original program, particularly for investors evaluating long-term appreciation and basis step-up benefits.
- Leverage experienced tax support: Because the transition guidance introduces new compliance requirements and planning considerations, investors, fund managers and project sponsors should work closely with their tax advisors to evaluate how the evolving regulations affect their specific circumstances.
How Wipfli can help
Opportunity Zones are entering a period of significant change, with new timelines, compliance requirements and planning considerations on the horizon.
Understanding how the transition rules apply to your investments can help you preserve benefits and avoid unexpected tax consequences. Talk to our Opportunity Zones team today to see how we can help you navigate new requirements and maximize returns.
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