An investor who holds a qualifying Qualified Opportunity Fund investment for at least 10 years can elect, on sale, to set its basis equal to fair market value, which takes the investment's appreciation out of federal income tax. As of October 2026, for amounts invested after December 31, 2026, that rule has a ceiling: a sale before the 30th anniversary uses value on the sale date, and a longer hold fixes basis at value on the 30th anniversary (Public Law 119-21, sec. 70421(c)(3)).
OZ 1.0 means investments made on or before December 31, 2026, and OZ 2.0 means investments made after that date. The election works the same way in both, except for the cap and the outside date. This is separate from the treatment of the original deferred gain, which is covered on the 5-year deferral and basis step-up.
Key points
- The election reaches the growth of the QOF investment, not the original deferred gain, which is taxed at year 5 (OZ 2.0) or at the end of 2026 (OZ 1.0).
- OZ 2.0: sold before the 30th anniversary, basis equals value at sale. Held longer, basis equals value on the 30th anniversary.
- OZ 1.0: no 30-year cap, but the election is available only for dispositions through December 31, 2047.
- Only the deferred-gain portion of an investment qualifies, and a portion that has an inclusion event loses the election.
- Notice 2026-55 asks how the 30-year rule should work in practice. The answers are not out yet.
What the statute says
As amended, section 1400Z-2(c) provides that for an investment held at least 10 years for which the taxpayer makes the election, "the basis of such investment shall be equal to" one of two values:
- for an investment sold before the date that is 30 years after the date of the investment, its fair market value on the date it is sold or exchanged; or
- in any other case, its fair market value on the date that is 30 years after the date of the investment.
The amendment applies to amounts invested in QOFs after December 31, 2026 (sec. 70421(c)(5)(A)). Before the 2025 law, the election set basis at fair market value on the date of sale with no time limit (prior 26 U.S.C. 1400Z-2(c)).
With basis equal to the sale price, there is no gain on the investment itself. On the face of the statute, a hold past the 30th anniversary leaves any change in value after that date taxable on sale, because basis stays at the 30-year value.
Timeline of one OZ 2.0 investment
The dates below are hypothetical, for $500,000 of deferred gain invested on April 1, 2027.
Investment made. Basis in the QOF interest is zero, and the holding period starts. Under the regulations, time spent holding the property that produced the gain does not count (26 CFR 1.1400Z2(b)-1(d)(1)(i)).
5th anniversary. Basis rises by 10 percent of the deferred gain and the remaining deferred gain is included in income for 2032. Basis then equals the step-up plus the gain recognized.
10-year mark. From here, a sale can carry the fair market value election.
30th anniversary. A sale before this date uses value on the sale date. If the investment is still held, basis under the election is fixed at value on this date.
Hypothetical example
Continue the timeline. Suppose the investor's basis after the 2032 inclusion is $500,000 ($50,000 step-up plus $450,000 recognized, assuming the investment was worth at least $500,000 then).
Sale in 2040 for $1,300,000. The investment has been held more than 10 years and is sold before April 1, 2057. With the election, basis equals $1,300,000 and the investor recognizes no gain on the investment. Without it, gain would be $800,000.
Sale in 2060 for $2,300,000, after a value of $2,000,000 on April 1, 2057. With the election, basis equals $2,000,000, the value on the 30th anniversary. On the face of the statute, the $300,000 of growth after that date is taxable. How that later growth should be treated is one of the questions Notice 2026-55 asks. Figures are illustrative only.
Which investments can make the election
Under 26 CFR 1.1400Z2(c)-1(b)(1), an investor who made a deferral election (or acquired the qualifying investment in a transaction that is not an inclusion event) and has held it at least 10 years may make the election on sale or exchange. Three limits apply:
- Deferred-gain portion only. Only the part of an investment that came from deferred eligible gain is a qualifying investment. The rest of a mixed-funds investment gets no election (section 1400Z-2(e)(1); 26 CFR 1.1400Z2(c)-1(b)(1)(iii)).
- Inclusion events. A portion that has an inclusion event stops being a qualifying investment and loses the election. Two exceptions in paragraphs (b)(1)(iv) and (v): amounts treated as gain under sections 301(c)(3), 1059(a)(2) or 1368(b)(2) or (c)(3), and partnership distributions in excess of basis, do not prevent a later election. See inclusion events.
- Worthlessness. If an investor claims a worthless-stock or other worthlessness deduction, that portion is treated as disposed of and the election no longer applies to it (26 CFR 1.1400Z2(b)-1(c)(14)).
Partnership and S corporation funds
A partnership or S corporation fund can be exited two ways: the investor sells the fund interest, or the fund sells its property. The regulations cover both.
Selling the interest. When a QOF partner makes the election on selling its interest, basis is adjusted to the interest's net fair market value plus the partner's share of partnership debt, and the fund's asset bases are adjusted in a manner similar to a section 743(b) adjustment (26 CFR 1.1400Z2(c)-1(b)(2)(i)).
The fund sells property. A partner or S corporation shareholder who has held a qualifying investment at least 10 years may elect to exclude all gains and losses allocated to the qualifying investment from the fund's sales of property for that tax year, other than ordinary-course inventory sales (paragraph (b)(2)(ii)). The election comes with a deemed distribution of cash at year end and an immediate recontribution of that cash for a non-qualifying interest in the fund.
The OZ 1.0 version
For 2017-law investments, an investor holding at least 10 years may elect a basis equal to fair market value on the date of sale, with no 30-year limit. The 2018 zones expire on December 31, 2028, but the regulations say expiration does not by itself impair the election. That protection does not cover dispositions after December 31, 2047 (26 CFR 1.1400Z2(c)-1(c)).
Notice 2026-40 also lets a fund or business that acquired property before a 2018 zone expired keep treating the zone as an Opportunity Zone for the property-use test through December 31, 2047.
The December 31, 2026 inclusion does not end the election. Notice 2026-40 sec. 4.01(3) says investors who recognize deferred gain on that date keep a qualifying investment and may make the election on a later sale if they meet the 10-year holding period and the other requirements through the disposition date.
What is still unsettled
- An outside date for OZ 2.0. The 2047 rule in 26 CFR 1.1400Z2(c)-1(c) was written for the 2018 zones. The IRS has not said whether a similar outside date will apply to investments in zones designated in 2027 or later.
- The 30-year mechanics. The Notice 2026-55 questions above are open.
- Updated regulations. The final regulations (T.D. 9889) have not been amended for the 2025 law as of October 29, 2026; the current paragraph (b)(1)(i) still refers to recognizing gain on December 31, 2026.
This page explains how the election works. It is not tax or investment advice, and a tax adviser should confirm eligibility before any sale that relies on it.
Common questions
How does the Opportunity Zone 10-year exclusion work?
If a qualifying QOF investment is held at least 10 years, the investor can elect on sale to set its basis equal to fair market value, so the appreciation on the investment is not taxed. The election applies only to the portion of the investment that came from deferred eligible gain.
What is the 30-year cap on Opportunity Zone investments?
For amounts invested after December 31, 2026, the election gives a basis equal to fair market value on the sale date only if the investment is sold before its 30th anniversary. If it is held longer, basis is fixed at fair market value on the 30th anniversary, so growth after that date is not covered by the election on the face of the statute.
Does the 30-year cap apply to investments made before 2027?
No. The cap applies to amounts invested after December 31, 2026. For 2017-law investments, the election stays available even after the zone designation ends, but only for dispositions through December 31, 2047.
Do OZ 1.0 investors lose the 10-year exclusion when they pay tax in 2026?
No. Notice 2026-40 sec. 4.01(3) says investors who recognize their deferred gain on December 31, 2026 still hold a qualifying investment and can make the 10-year election on a later sale if they meet the holding period and other requirements.
Can investors in a partnership QOF exclude gain when the fund sells a property?
The regulations let a partner or S corporation shareholder who has held a qualifying investment at least 10 years elect to exclude gains and losses allocated from the fund's sales of property for that year, other than inventory sales. Notice 2026-55 asks what changes are needed to apply this to the 30-year rule.