IRS Notice 2026-40 sets the rules for crossing from OZ 1.0 to OZ 2.0. For investors, it says when 2026 gains can use the new rules and what happens to OZ 1.0 deferred gain. For funds and businesses, it says property bought after December 31, 2026 for a 2018 zone generally does not qualify, with two narrow exceptions, and that expired 2018 zones can be treated as zones for certain tests through December 31, 2047.
On this site, OZ 1.0 means a Qualified Opportunity Fund (QOF) investment made on or before December 31, 2026, and OZ 2.0 means one made after. The notice was posted June 18, 2026 and published in Internal Revenue Bulletin 2026-28 on July 6, 2026.
The investor rules, in brief
Section 4 of the notice has three rules for investors. Each has its own page, so this is a summary.
- OZ 1.0 money held through 2026 (sec. 4.01). Remaining deferred gain is included for the tax year that includes December 31, 2026. That gain cannot be deferred again in any QOF, but the investment continues and can still qualify for the 10-year election. See the December 31, 2026 inclusion.
- 2026 gains invested from January 1, 2027 (sec. 4.02). Eligible gain realized on, before or after December 31, 2026 and invested in a QOF on or after January 1, 2027, within its 180-day window, can be deferred under the new rules. See invest in 2026 or wait for 2027.
- Inclusion-event gain (sec. 4.03). Gain triggered by an inclusion event, such as a sale of the QOF interest, can be deferred again by a new qualifying investment within 180 days of the event. The portion of the old investment that had the inclusion event is no longer a qualifying investment and loses its 10-year election.
Notice 2026-55 asks whether re-deferral of inclusion-event gain should be limited to sales and exchanges. Until the regulations answer, re-deferral of gain from other kinds of inclusion events, such as distributions, is less settled than re-deferral after a sale.
The general rule for 2018-zone property after 2026
The 2025 law changed the purchase-date test for Opportunity Zone business property. For property acquired after December 31, 2026, it must be bought after the zone's "applicable start date": the January 1 after the zone was certified, which is January 1, 2027 for the first new round (sec. 5.01(1); P.L. 119-21 sec. 70421(c)(4)(A), (c)(5)(B)).
A 2018 zone has no applicable start date, because it was designated before the 2025 law. So the notice concludes that property acquired by a QOF or a qualified opportunity zone business (QOZB) after December 31, 2026 "cannot be QOZBP unless" it is for use in a zone designated after July 4, 2025, or one of two exceptions applies. The same date logic governs QOZ stock and partnership interests acquired after 2026.
Exception 1: a working capital plan in place by December 31, 2026
Property acquired after December 31, 2026 for use in a 2018 zone, under a written plan that meets the existing working capital safe harbors in 26 CFR 1.1400Z2(d)-1(d)(3)(v) and (vi), can meet the purchase requirement if all four conditions in sec. 5.01(2)(b) are met:
- Plan adopted. The working capital plan was adopted on or before December 31, 2026.
- Consistent purchases. The acquisitions are made in a manner substantially consistent with that plan.
- 10 percent received. By December 31, 2026, the QOZB has received at least 10 percent of the total estimated working capital designated in writing under the plan.
- 5 percent spent. By December 31, 2026, the QOZB has spent at least 5 percent of that total. Amounts it is required to spend under a binding agreement entered into before January 1, 2027 count as spent.
The underlying safe harbor still applies: a written designation, a written schedule under which the money is spent within 31 months of receipt, and use substantially consistent with both; start-ups can chain safe harbors up to 62 months. The notice sets no other end date for transition plans. QOF purchases of QOZB stock or partnership interests after 2026 under such a plan are treated as made after the "applicable date" (sec. 5.01(2)(c)).
Hypothetical example
Suppose a QOZB adopts a written plan on October 1, 2026 to spend $20,000,000 of working capital on an apartment development in a 2018 zone that was not redesignated. By December 31, 2026 it has received $2,500,000 from its QOF and spent $600,000 on design and site work. On December 15, 2026 it also signed a binding construction contract requiring a $500,000 payment in February 2027.
- Received: $2,500,000 is 12.5 percent of $20,000,000, which meets the 10 percent test.
- Spent: $600,000 spent plus $500,000 required under the binding agreement is $1,100,000, or 5.5 percent, which meets the 5 percent test.
If the QOZB had received only $1,800,000 (9 percent), it would miss the 10 percent condition, and property bought in 2027 under the plan would fall back to the general rule. Meeting both numbers does not by itself satisfy the plan, schedule and consistency requirements.
The IRS mixed-use examples
Examples 4 and 5 in sec. 5.01(4) apply the exception to a $50 million mixed-use project in a 2018 zone that is not redesignated, built under a master plan covering 55 months: $30 million of commercial space on a 30-month schedule ending November 30, 2026, then $20 million of residential space over 25 months, estimated to finish by December 31, 2028. The QOF funds $30 million in May 2024 and buys more QOZB stock for the residential phase in December 2026. The IRS says property bought under the plan may qualify if purchases are substantially consistent with it.
In Example 5, the residential phase runs over budget and three months late, and the QOF puts in more cash in December 2027 to finish it, including a swimming pool that was part of the 2024 master plan. The IRS says the property may still qualify, and the December 2027 stock may be treated as acquired after the applicable date, because the cash completes the original plan.
Exception 2: ordinary-course replacement and modernization
Property acquired after December 31, 2026 to replace existing business property in the ordinary course, in a 2018 zone, may be treated as Opportunity Zone business property if the other statutory requirements are met (sec. 5.01(3)). Replacement includes modernization needed to continue operating. It does not include property acquired to expand the business or to move it into a new line of business.
| Example | Facts | Result |
|---|---|---|
| 1. Warehouse | A manufacturer buys a new warehouse on adjacent land on June 15, 2028 to add capacity for a new product | Does not qualify: an expansion, not under a pre-2027 plan |
| 2. Apartment turnover | Replacement windows, appliances, fixtures, cabinetry and flooring as units turn over in 2028 and 2029 | Qualifies: replacement in the ordinary course |
| 3. Restaurant kitchen | In 2028, a restaurant modernizes its kitchen, adds a more efficient ventilation system and replaces its point-of-sale system | Qualifies: modernization needed to keep operating |
| 4. Mixed-use plan | $50 million two-phase project under a 2024 master plan; residential phase funded December 2026 | May qualify under the working capital exception |
| 5. Cost overrun | Same project; more cash in December 2027 to finish items in the original plan | May qualify; the 2027 stock may be treated as acquired after the applicable date |
After a 2018 zone expires: the 2047 rules
The 2018 zones expire December 31, 2028, and Puerto Rico's deemed zones December 31, 2027. Because OZ 1.0 investors can still make the 10-year election for dispositions through December 31, 2047 (26 CFR 1.1400Z2(c)-1(c)), the notice previews two safe harbors so funds and businesses can keep passing their location-based tests after a zone ends (sec. 5.02):
- Property use. A QOF or QOZB that acquired qualifying property on or before its zone's expiration, or under either exception above, may keep treating the expired zone as a zone for the "substantially all of the use" requirement through December 31, 2047 (sec. 5.02(2)).
- Income and intangibles. A QOZB that began an active business in the zone by its expiration, or reasonably expects to under a qualifying written plan, may keep treating the expired zone as a zone for the 50 percent gross income and the intangible property tests through December 31, 2047 (sec. 5.02(3)).
The notice names only these tests. It does not separately address the 70 percent tangible property test, which counts property that qualifies as Opportunity Zone business property, the definition the property-use safe harbor covers. Confirm how the two fit together with counsel. See qualified opportunity zone business.
Outcomes at a glance
| Situation | Outcome | Section |
|---|---|---|
| Investor still holds OZ 1.0 interest on Dec 31, 2026 | Deferred gain included; cannot be reinvested; 10-year election survives | 4.01 |
| 2026 gain invested Jan 1, 2027 or later, within 180 days | OZ 2.0 deferral | 4.02(2) |
| Investor sells OZ 1.0 interest, reinvests within 180 days | New deferral allowed; sold portion loses 10-year election | 4.03(2) |
| Property bought in 2027 for a 2027 zone | Meets the purchase-date test if bought after Jan 1, 2027 | 5.01(1) |
| Property bought in 2027+ for a 2018 zone, no plan | Generally not QOZ business property | 5.01(1) |
| Same, under a plan meeting the 10%/5% test by Dec 31, 2026 | Can meet the purchase requirement | 5.01(2) |
| Same, ordinary-course replacement | May qualify; expansions do not | 5.01(3) |
| Expired 2018 zone, property held before expiration | Treated as a zone for the use, income and intangible tests through Dec 31, 2047 | 5.02 |
What is still open
- Proposed regulations. The notice previews them; they have not been issued. The existing regulations, as shown on eCFR as of October 29, 2026, still use the December 31, 2026 dates.
- Changing a plan. Notice 2026-55 asks whether QOZBs should be allowed to modify working capital plans. The notice's own Example 5 tolerates delay and overrun within the original plan, but there is no rule yet on amending one.
- Non-sale inclusion events. Notice 2026-55 asks whether re-deferral of inclusion-event gain should be limited to sales and exchanges.
Comments on Notice 2026-55 are due November 23, 2026. Developers working against the December 31, 2026 date can read the working capital safe harbor and for developers, and should have counsel review any plan before relying on it.
Common questions
What is IRS Notice 2026-40?
It is the IRS's transition guidance for the 2025 Opportunity Zone law, posted June 18, 2026 and published in Internal Revenue Bulletin 2026-28 on July 6, 2026. It previews proposed regulations and covers how OZ 1.0 investments, 2026 gains and property in 2018 zones are treated as the new rules take over.
Can a business keep buying property in a 2018 Opportunity Zone after 2026?
Generally no, unless the tract is redesignated in 2027 or an exception applies. Notice 2026-40 allows two: purchases under a working capital plan adopted by December 31, 2026 that had received at least 10 percent and spent at least 5 percent of its planned capital by then, and ordinary-course replacements or modernization of existing property. Expansions do not qualify.
What happens to a 2018 Opportunity Zone after it expires?
A fund or business that acquired qualifying property before the zone expired, or under the transition exceptions, may keep treating the expired zone as an Opportunity Zone for the property-use test through December 31, 2047. A business active in the zone by expiration, or under a qualifying plan, gets the same treatment for the 50 percent gross income and intangible property tests.
Can I reinvest gain from selling an OZ 1.0 fund interest?
Yes, if you make a new qualifying investment within 180 days of the inclusion event, per Notice 2026-40 sec. 4.03(2). The portion of the original investment that had the inclusion event loses its 10-year election. Gain recognized automatically on December 31, 2026 cannot be reinvested.
Do binding contracts count toward the 5 percent spending test?
Yes. Amounts a QOZ business is required to spend under a binding agreement entered into before January 1, 2027 count as spent for the requirement to expend 5 percent of the planned working capital by December 31, 2026.
Sources
- IRS Notice 2026-40, Transitional Guidance on Qualified Opportunity Zones (2026-28 I.R.B.)
- Internal Revenue Bulletin 2026-28
- Public Law 119-21, sec. 70421
- 26 CFR 1.1400Z2(d)-1 (eCFR)
- 26 CFR 1.1400Z2(a)-1 (eCFR)
- 26 CFR 1.1400Z2(c)-1 (eCFR)
- IRS Notice 2026-55, request for comments
- REG-116506-25, proposed reporting regulations