The short answer
If you hold a qualifying opportunity fund investment for at least ten years and make the election in section 1400Z-2(c) when you sell, your basis becomes the investment's fair market value on the sale date, so the growth inside the fund is not taxed. The election does nothing to the original deferred gain, which is taxed on its own earlier schedule. For money invested after December 31, 2026 the value is frozen at the 30-year anniversary if you still hold; for earlier money, the existing regulations allow the election for dispositions through December 31, 2047.
At a glance
| Holding period | At least ten years |
|---|---|
| Effect | Basis equals fair market value on the date of sale |
| Partnership funds | Basis includes your share of fund debt, and the fund's asset bases adjust too |
| Sales inside the fund | An annual election can exclude your share of the fund's asset-sale gains |
| Money invested by 2026 | Election available for dispositions through December 31, 2047 |
| Money invested after 2026 | Value fixed at the 30-year anniversary if still held |
| What it covers | Only the qualifying investment, not dollars beyond the deferred gain |
| What it never covers | The original deferred gain |
The exclusion is a basis election made in the year you sell
Section 1400Z-2(c) says that for an investment held at least ten years, if the taxpayer elects, the basis of the investment equals its fair market value on the date it is sold or exchanged. Sale price minus basis is then zero, so there is no gain to tax.
Nothing is claimed in the years in between. You hold, you report the investment each year on Form 8997, and you make the election on the return for the year of sale.
The election belongs only to a qualifying investment. Q25 of the IRS opportunity zone FAQs limits it to the part of the investment covered by a proper deferral election, so dollars you added beyond the gain are taxed normally on their growth; see gain or whole sale price.
Inside a partnership fund the election reaches the debt and the depreciation as well
Most real estate funds are partnerships, and Reg. Section 1.1400Z2(c)-1(b)(2)(i) sets a partner's basis at the net fair market value of the interest plus the partner's share of fund debt. The bases of the fund's own assets are adjusted at the same moment, as if the buyer had bought in with a section 754 election in place.
The regulation's Example 3 concludes that the selling partner 'recognizes no gain or loss on the sale.' Because the inside bases step up too, the depreciation the fund passed through over the decade is not recaptured on that sale.
Funds often sell buildings rather than investors selling units. For that case the regulation lets a partner who has held ten years elect, year by year, to exclude their share of gains from the fund's asset sales, other than inventory, as Q26 of the FAQs describes. The election is made on a timely filed return for each year it is wanted.
The original deferred gain is taxed separately, and earlier
The exclusion covers only appreciation. The gain you deferred into the fund is included on December 31, 2026 for money invested by then, or at the earlier of a sale or five years for money invested later, as compared in deferral length for 2026 versus 2027 investments.
For post-2026 money, holding five years first raises basis by 10% of the deferred gain, or 30% in a qualified rural opportunity fund, reducing the gain included at year five. The rural definition is in qualified rural opportunity funds.
After the inclusion, basis rises by the amount included. That basis matters only if you sell before year ten; once the election applies, basis is fair market value regardless.
A hypothetical $400,000 investment shows the exclusion at work
Assume a hypothetical $400,000 gain invested in a partnership fund in February 2027. In the tax year containing February 2032, basis rises by $40,000 and, if the interest is worth at least $400,000, $360,000 of gain is included and taxed. Basis is now $400,000.
In 2038, eleven years in, the investor sells the interest for $900,000 and elects. Basis becomes $900,000 and the $500,000 of growth is not taxed. Sell the same interest in 2035, before ten years, and $500,000 is taxable gain.
Fund values can fall as well as rise, and the exclusion is worth nothing on an investment that loses money. Treat the numbers as an illustration and have your CPA rework them for your sale.
What can cost you the exclusion before year ten
Any inclusion event takes the affected portion out of qualifying status. Q33 of the FAQs treats a gift to a child as an inclusion event, Q35 treats a transfer to a spouse in a divorce the same way, and Q34 says a transfer to your own revocable grantor trust is not one. Section 4.03 of Notice 2026-40 adds that a portion hit by an inclusion event can no longer get the ten-year election.
The fund must also keep qualifying. A fund that misses its 90% asset test owes a monthly penalty under section 1400Z-2(f), and what to check before you invest is in QOF due diligence.
Expiring zone maps are handled. Reg. Section 1.1400Z2(c)-1(c) keeps the election available after a zone designation lapses, for dispositions through 2047, and the notice describes safe harbors for funds in zones whose designations end. The longer treatment, including the 30-year rule, is in OZ ten-year and thirty-year rules.
Related questions
Do I have to sell to use the exclusion?
The basis election is made on a sale or exchange of the investment. For funds that sell their properties instead, the regulation provides a separate annual election to exclude your share of those gains after ten years.
Does the exclusion remove depreciation recapture?
On a sale of a partnership fund interest with the election, the regulation steps up both your basis and the fund's asset bases, and its example has the partner recognizing no gain or loss, so the recapture does not arise on that sale.
What happens at 30 years for money invested after 2026?
If you still hold, the election fixes basis at the fair market value on the 30-year anniversary, so growth after that date is taxable when you eventually sell.
Does the ten-year clock restart after the 2026 inclusion?
No. Notice 2026-40 says the election stays in effect after the deemed inclusion on December 31, 2026, so the original investment date still counts toward ten years.
Can a fund holding period be passed to heirs?
Section 1400Z-2(e)(3) taxes deferred gain to the estate or heirs as income in respect of a decedent; whether heirs keep the ten-year count is not settled in the sources reviewed here, so ask your estate attorney.
Sources
Checked against these publications on September 30, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.