The short answer
Hold a qualifying opportunity fund investment at least ten years and you may elect under section 1400Z-2(c) to set its basis to fair market value when you sell, which removes tax on the fund's own appreciation. For amounts invested after December 31, 2026 the 2025 act adds an outer limit: if you still hold the interest thirty years after investing, the election fixes basis at the fair market value on that thirtieth anniversary, so growth after that point is taxed. For earlier investments the regulations instead allow the election for dispositions through December 31, 2047. In a fund taxed as a partnership the election also reaches sales of property by the fund, and the basis of the fund's assets is adjusted so depreciation recapture is not passed to the electing investor.
At a glance
| Ten-year election | Basis of the fund interest becomes its fair market value on the date of sale |
|---|---|
| Post-2026 investments | If still held thirty years after investing, fair market value is fixed at the thirtieth anniversary |
| Pre-2027 investments | Election available for dispositions through December 31, 2047 |
| Fund-level sales | An electing partner may exclude gains and losses from the fund's property sales, except inventory |
| Recapture | The fund's asset basis is adjusted like a section 743(b) adjustment, so no recapture reaches the electing partner |
| Inclusion events | The portion of an investment hit by an inclusion event loses the election |
| Expiring zones | Do not impair the election |
| Order of events | The five-year inclusion of the deferred gain comes first; the ten-year exclusion covers only later growth |
The ten-year election sets your basis to fair market value on the day you sell
Section 1400Z-2(c) provides that for an investment held at least ten years, the taxpayer may elect to have the basis of the investment equal its fair market value on the date it is sold or exchanged. Reg. section 1.1400Z2(c)-1(b)(1)(i) limits the election to a qualifying investment, which means an interest bought with deferred eligible gain under a valid election, held for at least ten years, in an entity that still meets the fund requirements at disposition.
The election is separate from, and comes after, the deferral. The deferred gain itself is included at the earlier of a sale, another inclusion event or the fifth anniversary for post-2026 money, with a 10% or 30% basis step-up, as the rolling five-year deferral explains. Notice 2026-40, section 4.01(3), confirms that an investor who recognizes the deferred gain on the inclusion date keeps holding a qualifying investment and remains eligible for the ten-year election on a later sale.
Only the portion of an investment that was made with deferred gain qualifies. Section 1400Z-2(e)(1) treats an investment funded partly with other money as two separate investments, and the election applies only to the one to which the deferral election applied.
Thirty years is now the ceiling for post-2026 money; 2047 remains the limit for the rest
Amended section 1400Z-2(c) measures fair market value on the earlier of the date the investment is sold or exchanged, if that comes before the thirtieth anniversary of the investment, or the date thirty years after the investment was made. An investor who funds in 2027 and sells in 2060 therefore sets basis at the 2057 value and pays tax on growth between 2057 and 2060. The amendment applies to amounts invested after December 31, 2026.
Investments made on or before December 31, 2026 are outside the amendment, and Reg. section 1.1400Z2(c)-1(c) governs them. That paragraph says the election is not impaired merely because a zone's designation has ceased to be in effect, and then provides that the relief does not apply to elections related to dispositions occurring after December 31, 2047. The 2018 zones expire December 31, 2028, so for an investor who funded in 2020 the election is available on a sale at any time between 2030 and the end of 2047.
The two regimes produce different planning. A 2020 investor has a hard date to sell by. A 2027 investor has no deadline to sell, but holding past 2057 taxes the later growth, and the fund's own documents will set a shorter horizon in any case.
Fund-level property sales and depreciation recapture: how partners get the exclusion
Most opportunity funds are partnerships that hold real estate through zone businesses and sell buildings rather than investor interests. Reg. section 1.1400Z2(c)-1(b)(2) addresses that directly. A partner who has held the qualifying investment at least ten years may elect to exclude from income all gains and losses allocable to the qualifying investment from the fund's sale or exchange of property, other than gains or losses from the sale of inventory in the ordinary course of business.
The regulation also deals with recapture. When a partner's basis in the fund interest is adjusted to fair market value under section 1400Z-2(c), the bases of the fund partnership's assets, and of any partnership it owns directly or indirectly, are adjusted in a manner similar to the section 743(b) adjustments, so the electing partner does not recognize gain on those assets. Depreciation taken inside the fund, including bonus depreciation on cost-segregated components, is not pulled back as ordinary income to a partner who makes the election.
That is the opposite of a 1031 exchange, where the depreciation layer carries into the replacement property and is taxed as unrecaptured section 1250 gain at up to 25% when the chain ends, as does a 1031 defer depreciation recapture explains, unless the step-up at death intervenes.
A hypothetical $500,000 investment at years five, ten and thirty
Hypothetical, round numbers. You defer a $500,000 gain into a fund in January 2027. In January 2032 the five-year date arrives: basis rises by $50,000 and $450,000 of deferred gain is included for 2032, taxed at that year's rates. You now hold an interest with $500,000 of basis.
In 2039, after twelve years, the fund sells its buildings and your share of the proceeds is $1,100,000. You elect under section 1400Z-2(c); your basis becomes $1,100,000 and none of the $600,000 of growth is taxed, and because the fund's asset bases are adjusted, none of the depreciation the fund claimed comes back to you as recapture.
Suppose instead the fund keeps the property and you still hold the interest in January 2057, the thirtieth anniversary, when it is worth $1,700,000. Basis is fixed there. A sale in 2060 for $2,000,000 produces $300,000 of taxable gain, with the character and rates that apply in 2060. Run your own numbers with your CPA.
What forfeits the election: early sales, inclusion events, gifts and funds that stop qualifying
A sale before the tenth anniversary gets no election; the deferred gain, to the extent not already included, and all growth are taxed in the year of sale. Under Reg. section 1.1400Z2(c)-1(b)(1)(i), to the extent an inclusion event occurs with respect to any portion of a qualifying investment, that portion stops being a qualifying investment and loses the election, and Reg. section 1.1400Z2(b)-1(c) makes a gift of the interest an inclusion event. A transfer at death is not, and the heir takes the deferred gain as income in respect of a decedent rather than a stepped-up basis.
The fund must also still be a qualified opportunity fund when you dispose of the interest. That turns the sponsor's compliance with the 90% test and the zone business tests into your problem for a decade or more, which is why QOF due diligence focuses on the filed Forms 8996 and the pipeline of tracts. A fund that drifts out of compliance late in the hold can cost an investor the whole exclusion.
For a real estate gain where the whole sale price can be reinvested, a 1031 exchange into property or a DST defers everything and ends with a step-up at death; 1031 versus an opportunity fund versus paying the tax compares the two, and our opportunity zone fund page describes the funds we place clients in when the gain is not from real estate.
Related questions
Does the ten-year clock start when I sell the original asset or when I invest?
When you invest. Reg. section 1.1400Z2(b)-1(d) measures the holding period of the qualifying investment without regard to how long you held the property you sold, and the 180-day window does not count.
Do I still get the exclusion if the fund sells buildings instead of me selling my interest?
Yes, in a partnership or S corporation fund. Reg. section 1.1400Z2(c)-1(b)(2) lets a partner who has held the interest ten years elect to exclude gains and losses from the fund's sales of property, other than inventory sold in the ordinary course.
What does the thirty-year rule do to a fund investment made in 2024?
Nothing. The amendment applies to amounts invested after December 31, 2026. A 2024 investment is governed by the regulation, which allows the election for dispositions through December 31, 2047.
Will depreciation recapture come back when I elect after ten years?
Not to the electing partner. The regulation adjusts the bases of the fund's assets in a manner similar to section 743(b) when your interest's basis is set to fair market value, so gain on those assets, including recapture, is not recognized by you.
Can I gift my fund interest to a child and have them finish the ten years?
No. A gift is an inclusion event under Reg. section 1.1400Z2(b)-1(c)(3), which ends the deferral and removes the gifted portion from the election. A transfer at death is not an inclusion event.
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.
- 26 USC 1400Z-2, Special rules for capital gains invested in opportunity zones
- 26 CFR 1.1400Z2(c)-1, Investments held for at least 10 years
- 26 CFR 1.1400Z2(b)-1, Inclusion of gains deferred under section 1400Z-2
- IRS, Notice 2026-40, Transitional guidance on qualified opportunity zones
- 26 USC 1014, Basis of property acquired from a decedent
- IRS, Publication 544, Sales and other dispositions of assets