For money invested in a Qualified Opportunity Fund (QOF) after December 31, 2026, the Opportunity Zone program offers three capital gains benefits: tax on the reinvested gain is deferred for up to 5 years, 10 percent of that gain (30 percent in a rural fund) is permanently excluded after a 5-year hold, and appreciation on the QOF investment is tax-free after 10 years. As of October 2026, the older 2017-law benefits are closed to new money.
This page uses OZ 1.0 for QOF investments made on or before December 31, 2026, under the 2017 rules, and OZ 2.0 for investments made after that date, under the rules as amended by Public Law 119-21, sec. 70421 (July 4, 2025).
- Deferral
- Up to 5 years
- Step-up
- 10%, or 30% rural
- Exclusion
- After 10 years
- Window
- 180 days
The three benefits under OZ 2.0
1. Deferral of the original gain
An investor who sells property to an unrelated person can elect to defer tax on the gain by investing that amount in a QOF within 180 days. The 2025 law removed the old rule that barred elections for sales after 2026, so the election is now available indefinitely.
For money invested after December 31, 2026, the deferred gain is included in income in the tax year that includes the earlier of the date the investment is sold or the date 5 years after it was made. A non-sale inclusion event, such as a gift, also ends the deferral early. The amount included is the smaller of the deferred gain or the investment's fair market value on that date, minus the investor's basis. Starting basis is zero.
2. A 10 or 30 percent basis step-up
If the investment is held at least 5 years, basis rises by 10 percent of the deferred gain, so that 10 percent is never taxed. If the fund is a qualified rural opportunity fund, meaning a QOF with at least 90 percent of its assets in property or businesses in zones made up entirely of rural areas, the step-up is 30 percent. The statute treats the step-up as occurring before the 5-year inclusion date, so it reduces the gain taxed at that point. There is no 7-year step-up under the 2025 law.
3. Tax-free appreciation after 10 years
If the investment is held at least 10 years, the investor can elect a basis equal to fair market value when it is sold, so the appreciation is not taxed. For OZ 2.0 investments the election works only for a sale before the 30th anniversary; if the investment is held longer, basis is fixed at fair market value on that anniversary. IRS Notice 2026-55 asks for comments on how that 30-year rule should work in practice. Details are on the 10-year exclusion and 30-year cap page.
The same gain under each regime
Hypothetical example
Suppose an investor realizes a $500,000 long-term capital gain and invests exactly $500,000 in a QOF within 180 days. Assume the investment is worth at least $500,000 on every inclusion date and is worth $900,000 when sold.
- OZ 1.0 (invested in, say, June 2026). The $500,000 is included in income for the tax year that includes December 31, 2026. No step-up applies, because the 5-year and 7-year marks cannot be reached by that date. Taxable gain: $500,000. If the investor holds 10 years and makes the election, the $400,000 of appreciation is excluded.
- OZ 2.0 standard fund (invested in, say, April 2027). Deferral runs to April 2032. At 5 years, basis rises by $50,000 (10 percent). Taxable gain in 2032: $500,000 minus $50,000, or $450,000. After 10 years, the $400,000 of appreciation can be excluded on a sale before April 2057.
- OZ 2.0 rural fund (same dates). At 5 years, basis rises by $150,000 (30 percent). Taxable gain in 2032: $350,000. The 10-year exclusion works the same way.
If the investment were worth less than $500,000 on the inclusion date, the smaller value would replace $500,000 in each calculation. This is an illustration of the formula, not a projection.
Which gains qualify
Eligible gain is gain treated as capital gain for federal tax purposes, or qualified section 1231 gain. Both short-term and long-term capital gains qualify. Gain is measured without netting losses. An investor may defer part of a gain and keep the rest eligible for a later election. Gain that another Code provision recharacterizes as ordinary income, such as depreciation recapture under sections 1245 or 1250, does not qualify; qualified 1231 gain is 1231 gain above any amount recaptured as ordinary income.
As of October 29, 2026, the regulations in eCFR had not been updated for the 2025 law and still refer to the December 31, 2026 dates of the old sunset, which the statute has repealed. See eligible gains.
When the 180-day clock starts
| Type of gain | Default start | Alternatives |
|---|---|---|
| Direct sale of a capital asset | Day the gain would be recognized | None |
| Section 1231 gain | Day the 1231 gain was realized (IRS FAQ A15) | None |
| Partner's share of partnership gain | Last day of the partnership's tax year | Partnership's own sale-date period, or the partnership return's unextended due date |
| RIC or REIT capital gain dividend | Last day of the shareholder's tax year | Dividend payment date |
| Installment sale gain | Each payment date | Last day of the tax year the gain is recognized |
| Net section 1256 contract gain | Last day of the tax year | None |
| Gain from a QOF inclusion event | Date of the inclusion event | None |
The election is made on the federal return for the year the gain would otherwise be taxed. On Form 8949 the deferral goes on its own row with the QOF's EIN, the investment date, code "Z" in column (f) and the deferred amount as a negative number in column (g). See the 180-day rule and how to report an Opportunity Zone investment.
How much tax is at stake
The benefit depends on the rate that would otherwise apply. Per IRS Topic No. 409, assets held more than one year produce long-term gain; net short-term gain is taxed as ordinary income at graduated rates. For tax year 2025, the long-term rates are 0, 15 and 20 percent.
| Filing status | 0% up to | 15% up to | 20% above |
|---|---|---|---|
| Single | $48,350 | $533,400 | $533,400 |
| Married filing jointly | $96,700 | $600,050 | $600,050 |
| Married filing separately | $48,350 | $300,000 | $300,000 |
| Head of household | $64,750 | $566,700 | $566,700 |
These thresholds are adjusted each year. Two higher maximum rates apply to specific gains: 28 percent for collectibles and 25 percent for unrecaptured section 1250 gain on real property. Some individuals also owe the net investment income tax. State tax is separate; several states do not follow the federal Opportunity Zone rules. See state tax conformity.
OZ 1.0 history: what the 2017 law offered
Under the 2017 rules, deferral ended no later than December 31, 2026, holding 5 years raised basis by 10 percent of the deferred gain, and holding 7 years added another 5 percent. Because both holding periods had to be met by December 31, 2026, the 15 percent step-up required investing by the end of 2019 and the 10 percent step-up by the end of 2021. For OZ 1.0 investments, the 10-year election remains available for dispositions through December 31, 2047, under 26 CFR 1.1400Z2(c)-1(c). A side-by-side table is on OZ 1.0 vs OZ 2.0.
Gains earned through partnerships and LLCs
A partnership, or an LLC taxed as one, can make the deferral election itself, with its own 180-day period starting on the sale date. If it does not, each partner can elect for its share, with the default 180-day period starting on the last day of the partnership's tax year. Because the partner's alternatives can shift the window by months, the timing across the December 31, 2026 boundary deserves a tax adviser's review.
Common questions
What are the tax benefits of investing in an Opportunity Zone?
For money invested in a Qualified Opportunity Fund after December 31, 2026, there are three: tax on the invested gain is deferred for up to 5 years, 10 percent of that gain (30 percent in a qualified rural opportunity fund) is never taxed if the investment is held 5 years, and appreciation on the investment can be excluded if it is held at least 10 years and sold before its 30th anniversary.
Can I still defer capital gains until December 31, 2026?
Only for money invested in a QOF on or before December 31, 2026, and that deferral ends on that date: the gain is included in income no later than the tax year that includes December 31, 2026. Money invested on or after January 1, 2027 within its 180-day window gets the new rolling 5-year deferral instead.
Do short-term capital gains qualify for Opportunity Zone deferral?
Yes. Eligible gain is any gain treated as capital gain for federal tax purposes, plus qualified section 1231 gain. Gain that another Code section recharacterizes as ordinary income, such as depreciation recapture, does not qualify.
Is the 15 percent Opportunity Zone step-up still available?
No. The 15 percent step-up required a 7-year hold by December 31, 2026 and the 10 percent step-up required 5 years, so no new investment can earn either. The 2025 law has no 7-year step-up.
When does the 180-day period start for a partner's share of gain?
Generally on the last day of the partnership's tax year. A partner can instead use the partnership's own 180-day period starting on the sale date, or a period starting on the unextended due date of the partnership return.