Opportunity Zones After the 2025 Tax Act: What Changed and When

The act fixed five dates, and each one moves a different rule

The opportunity zone provisions were written in 2017 with a hard stop: gains had to be recognized before January 1, 2027 to qualify, every deferred gain came due on December 31, 2026, and the zone map was drawn once. Section 70421 of Public Law 119-21 removed the stop and replaced it with a permanent cycle, now reflected in section 1400Z-2 and section 1400Z-1. Notice 2026-40 is the IRS transition guidance and is the source for the dates below.

Nothing in the act changed what you invest. Only capital gain and qualified section 1231 gain are eligible, the gain alone has to reach the fund within 180 days, and 1031 exchange proceeds still cannot be routed into a fund, as using 1031 funds for an opportunity zone fund explains.

• July 4, 2025: the substantial improvement threshold for property in a zone made up entirely of a rural area dropped from 100% to 50% of basis.
• Taxable years beginning after July 4, 2025: funds owe the new annual information return under section 6039K, with a penalty under section 6726 for not filing.
• July 1, 2026: the first decennial determination date; governors had 90 days, extendable to October 28, 2026, to nominate tracts under a narrower low-income definition.
• January 1, 2027: new designations take effect and run through December 31, 2036; investments made after December 31, 2026 get the five-year rolling deferral, the 10% or 30% step-up and the 30-year cap.
• December 31, 2028: the 2018 designations expire, a year after Puerto Rico's.

The deferral is now five years from the day you invest, not a calendar cliff

Amended section 1400Z-2(b)(1) includes the deferred gain in the taxable year containing the earlier of the date the investment is sold or exchanged or the date five years after the investment was made, and Notice 2026-40, section 4.02(2), adds any other inclusion event, such as a gift of the interest, to that list. The amendments apply to amounts invested after December 31, 2026.

Section 1400Z-2(b)(2)(B) then gives a 10% basis increase if the investment has been held five years, or 30% for an investment in a qualified rural opportunity fund. There is no longer a seven-year step. In practice an investor who funds in 2027 pays tax on 90% of the deferred gain, or 70% in a rural fund, in 2032, and needs the cash to do it from somewhere other than the fund. The rolling five-year deferral works through the timing.

Investing during 2026 buys nothing, because the old inclusion date still applies

Prior section 1400Z-2(b)(1)(B) and Reg. section 1.1400Z2(b)-1(b) require gain deferred through an investment made on or before December 31, 2026 to be included in the taxable year that includes December 31, 2026. Notice 2026-40, section 4.01, confirms that rule survives and goes further: the gain so included, which the notice calls deemed included gain, cannot be deferred again under either the old or the new statute, because the original election is still in effect.

The one consolation sits in section 4.01(3) of the notice. An investor who recognizes deemed included gain on December 31, 2026 continues to hold a qualifying investment and stays eligible for the ten-year election on a later sale, provided the holding period and the other requirements are met through the date of disposition.

Section 4.02(2) opens the better route. A taxpayer with eligible gain realized on, before or after December 31, 2026 who invests a corresponding amount in a fund on or after January 1, 2027, within the 180-day window, gets the new five-year rule. A sale closing in the second half of 2026 can therefore wait until January 2027 to fund, and the 180-day clock, not the calendar year, decides whether it qualifies.

A new map arrives in 2027 while the 2018 zones wind down

Amended section 1400Z-1(c)(1) narrows which tracts qualify. A tract outside a metropolitan area needs median family income at or below 70% of the statewide median, a metropolitan tract at or below 70% of the metropolitan area median, or in either case a poverty rate of at least 20% with income at or below 125% of the relevant median. Contiguous non-qualifying tracts can no longer be added. Rev. Proc. 2026-14 identifies 25,332 eligible tracts, 8,334 of them entirely rural, and keeps the state cap at 25% of eligible tracts. The 2027 designation calendar has the full timeline.

For funds holding property in a 2018 zone, the harder change is in section 5 of Notice 2026-40. Tangible property acquired after December 31, 2026 cannot be qualified opportunity zone business property unless it is for use in a zone designated after July 4, 2025, or one of two exceptions applies: purchases under a working capital safe harbor plan adopted by December 31, 2026, where the business had received at least 10% of the planned capital and spent at least 5% by that date, or ordinary-course replacement of existing business property. Expansion into a tract that is only a 2018 zone is out after 2026.

Rural zones get a larger step-up and a lower improvement bar

Section 1400Z-2(b)(2)(C) defines a qualified rural opportunity fund as one holding at least 90% of its assets in zone property used in a zone comprised entirely of a rural area, where rural means any area other than a city or town of more than 50,000 people and any urbanized area contiguous and adjacent to such a place. Notice 2025-50 lists 3,309 of the 8,764 existing zones as entirely rural.

Two benefits follow. The five-year basis step-up is 30% instead of 10% for amounts invested after December 31, 2026, and since July 4, 2025 property in a rural zone is substantially improved once additions to basis exceed 50% of the starting adjusted basis rather than 100%. Qualified rural opportunity funds and the substantial improvement test cover each in detail.

What a seller with a 2026 gain should do with this

If the gain is from real estate and you can reinvest the whole price, a 1031 exchange still defers everything with no five-year reckoning; 1031 versus an opportunity fund versus paying the tax sets the three side by side. If the gain is from a business, stock or a property that has already closed, an opportunity fund is the only deferral left, and the timing rule above says to fund it on or after January 1, 2027, inside your 180 days.

The fund itself needs the same scrutiny as any private placement: self-certification on Form 8996, the twice-yearly 90% test, the sponsor's plan for the new reporting and the exit horizon, which QOF due diligence lays out. Our opportunity zone fund page describes how we place clients in these funds, and the opportunity zone case study shows a business sale handled this way.