IRS’s Opportunity Zone regime is permanent…
And revised for investments made after 2026. The program allows taxpayers to defer capital gains from the sale of business or personal property by investing proceeds in Qualified Opportunity Funds to help the development of low-income communities. It was enacted under the 2017 Tax Cuts and Jobs Act and was set to end after 2026. But federal lawmakers made it permanent in the “One Big Beautiful Bill.” The OBBB also made some changes to the regime.
All sorts of taxpayers are eligible to participate: Individuals, C corps, partnerships, S corps, real estate investment trusts, and more.
To take advantage of the tax break, the gains must be invested in a QOF… Qualified Opportunity Fund. A QOF is an entity formed for the purpose of investing in businesses in qualified opportunity zones and that holds at least 90% of its assets in such zones. An entity certifies it’s a QOF by attaching Form 8996 to its tax return.
You have 180 days from the sale date to invest gain proceeds in a QOF. You can invest all of your short- or long-term capital gain proceeds from the sale or exchange of assets to an unrelated party in a QOF, or just part of the gains. Only the portion of the gains contributed to the QOF qualifies for deferral.
If you opt to use this break, you must elect deferral on Form 8949, which you would file with your federal return for the year the capital gain is realized.
You must also attach Form 8997 to let the IRS know of the QOF investment, deferred gains at the start and end of the year, and any sales of QOF interests.
Let’s turn to tax benefits from investing capital gains in a QOF after 2026:
The gain is deferred for five years or to you sell the QOF, if earlier.
The longer you hold a QOF investment, the more tax incentives there are. You begin with a zero tax basis. If you hold the QOF for at least five years, your basis increases by 10% of the originally deferred gain. If you hold it for 10 or more years, you can elect to adjust the tax basis to its fair market value on the date you sell or exchange your QOF interest, so that post-acquisition appreciation in the QOF isn’t taxed when you sell your interest. (Note your originally deferred gain is taxed five years after investment in the QOF and hikes your basis in the QOF at that time.)
The tax break is bigger for investing in a Qualified Rural Opportunity Fund. A QROF invests at least 90% of its assets in businesses located in opportunity zones comprised entirely of rural property. The basis step-up for QROF investments held at least five years is 30%, compared with the 10% basis hike for regular QOFs. Take care if you decide to invest your 2025 or 2026 capital gains in a QOF. The tax breaks are smaller. The gain is deferred only until Dec. 31, 2026, and there is no 10% step-up in the basis of your QOF investment at the five-year mark. Thus, taxpayers with large unrealized capital gains who are mulling investing in a QOF or QROF may want to wait until 2027 to recognize the gain and make the investment.