The One, Big, Beautiful Bill (OBBB) made substantial changes to the opportunity zone (OZ) incentive, most notably making the opportunity zone incentive a permanent part of the Internal Revenue Code (IRC). There are significant differences between the OBBB’s version of opportunity zones (OZ 2.0) and the 2017 Tax Cuts and Jobs Act (TCJA) version (OZ 1.0). Due to these differences, taxpayers need to carefully consider certain planning strategies to optimize the tax benefits of OZ 2.0. Our specialists have outlined 10 strategies taxpayers should consider when it comes to opportunity zones.
1. Be aware of the substantial tax benefits of opportunity zones 2.0 versus opportunity zones 1.0
OZ 1.0 provided maximum tax benefits to those who got in early. OZ 2.0 revived many of those tax benefits, but only for investments made into qualified opportunity funds (QOFs) on or after Jan. 1, 2027. To the extent that an opportunity zone investor can influence the timing of capital gains, they could enhance the opportunity zone tax benefits of their investment as follows by delaying their QOF investment until OZ 2.0 goes live on Jan. 1, 2027:
- Defer capital gain to 2032 vs. 2026.
- 10% reduction in deferred capital gain required to be recognized at the end of the deferral period.
- Potential to exclude an additional nine or 10 years of appreciation in the opportunity zone investment (2057 vs. 2047).
- Automatic step-up in basis to fair market value on the 30th anniversary of the QOF investment, if the opportunity zone investment hasn’t been sold.
2. Understand the earliest date that a capital gain is eligible for opportunity zones 2.0
Following are the earliest dates that a capital gain could qualify for OZ 2.0:
- Taxpayer capital gains. Capital gains realized directly by the QOF investor can qualify for OZ 2.0 as early as July 8, 2026 (which includes a three-day cushion assuming that wire transfers may be impossible to initiate between Jan. 1 and 3, 2027, due to holidays and weekends).
- Pass-through capital gains. Capital gains passed through to a taxpayer via a Schedule K-1 qualify for OZ 2.0 beginning on Jan. 1, 2026, if the pass-through entity doesn’t terminate before April 2026.
3. Consider delaying recognition of a pass-through entity’s capital gain from 2025 to 2026
Since taxpayers can tap into OZ 2.0 tax benefits if they have capital gains in a pass-through entity as early as Jan. 1, 2026, there could be substantial incentive for taxpayers to delay recognition of a pass-through entity’s capital gain until Jan. 1, 2026.
4. Understand that opportunity zone 2.0 tax benefits can be available for investments into OZ 1.0 designated census tracts
Even though the 10% basis reduction expired for OZ 1.0 designated qualified opportunity zones (QOZs) on Dec. 31, 2021, the OBBB revived the 10% basis reduction for OZ 1.0 designated QOZs if the investment in the QOF is made on or after Jan. 1, 2027. Similarly, investments into OZ 1.0 designated QOZs can now qualify for a five-year deferral of capital gain if the investment in the QOF is made on or after Jan. 1, 2027. Before the OBBB, the latest that an eligible gain could be invested into a QOF was early/mid-September 2027 (for capital gains flowing through on a 2026 Schedule K-1), and eligible investments made between Jan. 1, 2027, and early/mid-September 2027 wouldn’t have been eligible for gain deferral or the 10% basis step-up, but they are now.
5. Be aware that 2027 and 2028 QOF investments can be deployed into opportunity zones designated in either 2018 or 2026
Since the OZ 1.0 QOZ designations don’t expire until Dec. 31, 2028, there will be a one-time overlap in QOZ designations from Jan. 1, 2027, through Dec. 31, 2028. There’s no requirement for QOF investments made in 2027 or after to be invested into OZ 2.0 designated QOZs. If the business satisfies the qualified opportunity zone business (QOZB) requirements, it can receive investments from any QOF regardless of the timing of the investments made into the QOF and regardless of the timing of the QOZB’s investment in qualified opportunity zone business property (QOZBP). For example, a QOZB that completes construction of a multifamily apartment building in an OZ 1.0 designated QOZ in 2026 can receive investment from a QOF in 2027 and use the proceeds from the QOF investment to pay down a construction or bridge loan.
6. Consider how fair market value could impact the amount of deferred gain required to be recognized on Dec. 31, 2026
QOF investors with the flexibility to make a QOF investment either before or after the Jan. 1, 2027, cutoff date for OZ 2.0 should consider how the fair market value component of the deferred gain recognition calculation may impact the amount of deferred gain required to be recognized on Dec. 31, 2026, if they make their QOF investment by Dec. 31, 2026. The OZ statute and Treasury Regulations provide that a QOF investor is only required to recognize deferred capital gain at the end of the deferral period to the extent of the fair market value of the taxpayer’s investment in the QOF on such date. Consequently, depending upon the facts and circumstances, it could be more advantageous for a QOF investor to forgo the OZ 2.0 five-year deferral and 10% basis step-up by making the investment in the QOF by Dec. 31, 2026, under OZ 1.0, rather than waiting until 2027. For example, if a real estate project is expected to be under construction on Dec. 31, 2026, the valuation discount associated with the construction and lease-up risk of such project could result in the investor recognizing a lower amount of deferred capital gain on Dec. 31, 2026, than the investor would recognize if they delay their investment into the QOF until 2027 to qualify for the five-year deferral and 10% basis step-up under OZ 2.0.
7. It’s possible that the tax rate on capital gains could go up
Another potential downside to consider when it comes to delaying QOF investments is the possibility that the tax rate on capital gains could be higher when the OZ 2.0 gain deferral is required to be included in income.
8. Consider delaying a building purchase until 2027, if the property isn’t in a 2018 QOZ
One of the requirements for QOZBP is that it’s acquired by purchase after a particular date. For OZ 1.0, such date was Dec. 31, 2017. The OBBB revised the OZ statute to replace Dec. 31, 2017, with the applicable start date of the QOZ. With respect to the transition from the initial 2018 QOZ designations to the 2026 QOZ designations that become effective on Jan. 1, 2027, there will be three possible scenarios, as follows:
- QOZ was designated in 2018 and 2026. In this case, the tangible property must be purchased or leased after Dec. 31, 2017, to qualify as QOZBP.
- QOZ was designated in 2026 but not in 2018. In this case, the tangible property must be purchased or leased after Dec. 31, 2026, to qualify as QOZBP.
- QOZ was designated in 2018 but not in 2026. In this case, the tangible property must be purchased or leased after Dec. 31, 2017, to qualify as QOZBP. Please note that since the OZ 1.0 QOZs expire on Dec. 31, 2028, it’s not clear how/if such expiration may impact the QOZBP eligibility of tangible property purchased or leased after Dec. 31, 2028.
It’s worth noting that the IRS has taken the position that building improvements can’t be QOZBP if they’re made to own (versus lease) tangible property that’s not QOZBP. As such, if a building is in a QOZ that’s designated for the first time in the 2026 round of QOZ designations, then improvements made to such building in 2027 or after can’t be QOZBP if the building was acquired before 2027. Consequently, it could be beneficial to delay a building purchase until 2027 unless the census tract was designated as a QOZ in 2018. Vacant land isn’t as problematic since a building constructed on vacant land can be QOZBP even if the land isn’t QOZBP.
The final opportunity zone regulations include a safe harbor that allows taxpayers to treat self-constructed property as purchased on the date when the taxpayer pays or incurs more than 10% of the total cost of the property, excluding the cost of any land and preliminary activities such as planning or designing, securing financing, exploring, or researching.
9. Maximize your after-tax IRR by pairing 100% bonus depreciation with the opportunity zone gain exclusion
One of the better publicized provisions of the OBBB was the permanent return of 100% bonus depreciation. Accelerating depreciation deductions in an OZ via cost segregation supercharges after-tax IRR by converting a valuable timing difference into permanent tax savings. Until the enactment of the OBBB, bonus depreciation was scheduled to be completely phased out by 2027 and would’ve been reduced to 40% in 2025. However, now that 100% bonus depreciation has been permanently reinstated, OZ investors will once again be able to maximize their after-tax IRR by pairing 100% bonus depreciation with OZ gain exclusion.
10. Keep an eye out for additional guidance related to opportunity zones
It seems likely that some clarification of the transition from OZ 1.0 to OZ 2.0 will be forthcoming in the form of Treasury guidance. Topics that could be addressed in such guidance include:
- Whether deferred capital gains recognized on Dec. 31, 2026, are eligible for further deferral under OZ 2.0 via investment into a QOF within 180 days of Dec. 31, 2026.
- Impact of the Dec. 31, 2028, expiration of OZ 1.0 QOZ designations upon QOZBP acquired after the expiration of the QOZ.
Implementing the above planning strategies is feasible with the right team. Ready to take advantage of the new and improved OZ 2.0 tax incentive? Contact us to get started.
