An Opportunity Zone deferral is elected on your federal return for the year the gain would otherwise be taxed: a separate Form 8949 row with code Z, plus Form 8997, which you then file every year you hold the investment. As of October 2026, the steps below follow the 2025 Form 8949 instructions and the 2025 Form 8997, the latest versions released.
This page uses "OZ 1.0" for investments made on or before December 31, 2026 and "OZ 2.0" for investments made after that date. The reporting steps are the same in both until the gain comes due. The timing of that inclusion is what differs.
Key points
- The deferral election is its own Form 8949 row: fund EIN, investment date, code Z, deferred amount as a negative number.
- Form 8997 is filed for every year you hold the investment and for the year you dispose of it.
- OZ 1.0 deferred gain is included on the 2026 return. OZ 2.0 gain is included at the earlier of a sale or 5 years.
- Code Y reports previously deferred gain when you sell.
The steps, in order
- Confirm the gain and the window. Eligible gain is capital gain or qualified section 1231 gain. You have 180 days to invest it in a Qualified Opportunity Fund (QOF), and the period generally begins on the day the gain would otherwise be recognized (26 CFR 1.1400Z2(a)-1). Partnership, installment-sale and other pass-through gains have their own start dates, covered on the 180-day rule page. You may defer part of a gain.
- Report the sale normally. Report the gain on Form 8949 and Schedule D, or Form 4797 for section 1231 property, as you otherwise would. The Form 8949 instructions say not to adjust that row for the deferral.
- Add the code Z row. On its own row of Form 8949, in Part I with box C or I checked for short-term gain, or Part II with box F or L checked for long-term gain: the fund's EIN in column (a), the date you invested in column (b), columns (c), (d) and (e) blank, code Z in column (f), and the deferred amount as a negative number in column (g) (Instructions for Form 8949 (2025)). Use a separate row for each fund and each investment date. Attach the Form 8949 with code Z first.
- For section 1231 gain, use two rows. The first row reads "QOF INVESTMENT FROM FORM 4797" in column (a), code O in column (f), and the amount from Form 4797 as a positive number in column (g). The second is the code Z row.
- File Form 8997 for the deferral year. Report the new deferral in Part II and your holdings at year end in Part IV. See Form 8997 for the columns and special gain codes.
- File Form 8997 every year you hold. Part I lists holdings at the start of the year and must match last year's Part IV, or you attach an explanation. Part IV lists holdings at the end. File it with your timely return, including extensions.
- Report the inclusion when the gain comes due. For OZ 1.0, that is the 2026 return. For OZ 2.0, it is the year of the earlier of a sale, another inclusion event, or 5 years after the investment. Details are in the next section.
- Report a sale with code Y. If you sell or exchange the QOF interest, report the previously deferred gain on its own Form 8949 row: the fund's EIN in column (a), columns (b) through (e) completed, code Y in column (f), and the deferred gain as a positive number in column (g). The gain keeps the character it had when you deferred it. Report the event in Form 8997 Part III, and check the Part III box if you did not receive a Form 1099-B.
- At exit after 10 years, make the election. If you held a qualifying investment at least 10 years, you may elect on its sale or exchange to treat its basis as fair market value (26 CFR 1.1400Z2(c)-1(b)). See the last section below.
One investment, start to finish
Hypothetical example
Suppose an individual sells stock in March 2027 at a $500,000 long-term gain and invests $500,000 in a QOF in May 2027, inside the 180-day window. This is an OZ 2.0 investment.
2027 return: The stock sale goes on Form 8949 as usual. A second row in Part II shows the fund's EIN, the May 2027 date, code Z and ($500,000). Form 8997 shows the deferral in Part II and the holding in Part IV.
2028 to 2031 returns: Form 8997 each year, Parts I and IV.
2032 return: Five years after the May 2027 investment, the deferred gain is included. Holding 5 years raises basis by 10 percent of the deferred gain, $50,000, before the inclusion, so at most $450,000 is included. The amount included is the smaller of the deferred gain or the investment's fair market value on that date, minus basis. If the fund were a Qualified Rural Opportunity Fund, the increase would be 30 percent, $150,000.
Year of sale, 2037 or later: Holding at least 10 years, the investor may elect basis equal to fair market value if sold before the 30th anniversary.
The exact 2032 entries will depend on the forms in use then. The math follows new section 1400Z-2(b) and is illustrated by the OZ tax benefit calculator.
The 2026 inclusion for OZ 1.0 investors
If you made a deferral election for an investment on or before December 31, 2026, the deferred gain must be included no later than the tax year that includes December 31, 2026 (Notice 2026-40, sec. 4.01). The amount is figured under the prior-law rules, which include the 10 percent basis increase after 5 years and the extra 5 percent after 7 years for investments held that long by then.
- When it is reported. For a calendar-year individual, on the 2026 return, due April 15, 2027. An automatic 6-month extension of time to file is available to individuals (26 CFR 1.6081-4).
- No second deferral. Gain included on December 31, 2026 because you still held the investment cannot be deferred again into another fund.
- The 10-year election survives. You keep the QOF investment and can still make the 10-year election on a later sale if you meet the holding period and other requirements.
- Which forms. The 2025 Form 8949 instructions describe recognition on a sale "or December 31, 2026, whichever is earlier," and use code Y for sales. As of October 30, 2026, the 2026 Form 8997 and Form 8949 instructions, which will say how the December 31 inclusion is entered when nothing was sold, had not been released.
Other inclusion events
A sale is not the only trigger. An inclusion event generally occurs when something reduces your direct equity interest in the qualifying investment, or when you receive a distribution on it. Gifts are generally inclusion events; transfers at death generally are not. Gain from an inclusion event can be deferred again with a new qualifying investment within 180 days of the event, but the part of the investment that had the event loses its 10-year election. See inclusion events.
Under proposed regulations REG-116506-25, a fund would give a statement to each investor who disposed of an investment by March 1 of the next year, and brokers would report dispositions of QOF interests on Form 1099-B. These rules are proposed, not final, as of October 30, 2026.
The 10-year election at exit
For OZ 1.0 investments, an investor holding at least 10 years may elect basis equal to fair market value on the date of sale, and the regulations keep that election available after the zone designation ends, but only for dispositions through December 31, 2047 (1.1400Z2(c)-1(c)).
For OZ 2.0 investments held at least 10 years, basis may be elected at fair market value at sale if sold before the 30th anniversary of the investment. If held longer, basis is fixed at fair market value on the 30th anniversary. See the 10-year exclusion and 30-year cap.
The regulations describe the election as made on the sale or exchange of the qualifying investment. The 2025 Form 8949 instructions do not give it a separate code, so the instructions for the year of sale control how it is shown. Where a QOF partnership or S corporation sells assets and the owner elects to exclude that gain, the regulations require the election to be made on the applicable form filed with the owner's timely return, without extensions, for each year it is wanted (1.1400Z2(c)-1(b)(2)(ii)(D)).
Reporting errors on these forms can cost a benefit that took years to earn. A tax adviser with your full Form 8997 history is the right person to prepare the exit-year return.
Common questions
How do I elect to defer a capital gain into a Qualified Opportunity Fund?
On the federal return for the year the gain would otherwise be taxed. Report the sale as usual, then add a separate Form 8949 row with the fund's EIN in column (a), the investment date in column (b), columns (c) to (e) blank, code Z in column (f), and the deferred amount as a negative number in column (g). Also file Form 8997.
What does code Z mean on Form 8949?
Code Z marks the row that elects to postpone gain invested in a Qualified Opportunity Fund. Code Y is the code used later, when you report previously deferred gain because you sold or exchanged the QOF investment.
Do I need to file anything in years when nothing happens?
Yes. Form 8997 is filed for each year you hold the investment, showing holdings at the start of the year in Part I and at the end in Part IV, and for the year you dispose of it.
How do I report the December 31, 2026 inclusion?
Deferred gain from an OZ 1.0 investment is included no later than the tax year that includes December 31, 2026, so it belongs on the 2026 return, due April 15, 2027 for a calendar-year individual. As of October 30, 2026, the 2026 Form 8997 and Form 8949 instructions that will show the exact entries had not been released.
How is the 10-year exclusion claimed when I sell?
The regulations say an eligible investor may make the section 1400Z-2(c) election on the sale or exchange of a qualifying investment held at least 10 years. The 2025 Form 8949 instructions do not set out a separate code for it, so the instructions for the year of sale control. For OZ 1.0 investments, the election is available for dispositions through December 31, 2047.