QOZ 2.0 is coming. Are you ready?

Since 2017, the opportunity zone program has offered investors an unusual combination of tax deferral and tax elimination, but always with an expiration date attached. For investments made after December 31, 2026, the One Big Beautiful Bill Act (OBBBA) removes that expiration date, making the qualified opportunity zone (QOZ) program permanent and adding new incentives for long-term investment. The revised program, commonly called QOZ 2.0, generally applies to investments made on or after January 1, 2027. For investors with 2026 gains, it is possible to get the benefit of this new program.

Five year tax deferral for every investment

Under QOZ 2.0, an investor generally may defer paying US federal income tax on eligible gain invested in a qualified opportunity fund (QOF) until five years after the investment, unless a sale or other inclusion event occurs first. An investment held for at least five years also receives a basis increase equal to 10% of the deferred gain, or 30% for an investment in a qualified rural opportunity fund.

This is a significant departure from the original program, under which all remaining deferred gain must be recognized no later than December 31, 2026. The original 10% and 15% basis increases required five- and seven-year holding periods ending by that date, so investors who came in after 2021 could not receive either one. QOZ 2.0 measures the holding period from each investment date, so the five-year benefit is available to every new investment.

As with the original program, the best benefit remains. That is, post-investment appreciation and depreciation recapture after a 10-year holding period may be excluded from US federal income tax (and in conforming states subject to no state income tax).

Getting 2026 gains into QOZ 2.0

Recognizing gain in 2026 does not necessarily rule out QOZ 2.0. Notice 2026-40 makes clear that eligible gain may qualify under the new rules if the corresponding investment is made on or after January 1, 2027, and within the applicable 180-day period. For a gain recognized in 2026, the answer may simply be to wait until January to invest.

How much time an investor has depends on how the gain is recognized. For gain recognized directly, the 180-day period generally begins on the date of the sale, so only certain gains recognized in the second half of 2026 will have an investment period that reaches into 2027. On the other hand, pass-through gain through a partnership or S corporation can provide considerably more time; where a pass-through entity does not make the deferral election itself, a partner or shareholder generally may use alternative start dates tied to the entity’s year-end or the due date of its return (without extensions). A partner in a calendar-year entity may therefore be able to invest in 2027 eligible gain the entity recognized as early as January 2026. The investment may potentially be made as late as September 2027.

A QOF investment that was made before January 1, 2027, is a different matter. The deferred gain remains subject to inclusion on December 31, 2026, and while the investment may still qualify for the 10-year exclusion, it will not receive the new five-year deferral or basis increase.

For existing QOF investors, the automatic inclusion of deferred gain on December 31, 2026, does not produce gain eligible for a new deferral election. Gain recognized from an actual inclusion event, such as a sale of a QOF interest before year-end, may be eligible if it is reinvested within 180 days of the inclusion event. A sale, however, gives up the benefits of the original investment, including its accumulated holding period.

New maps, new opportunities (and transition rules)

Property located in an existing opportunity zone will not necessarily be located in a zone designated for QOZ 2.0. The new maps should be released by the Internal Revenue Service (IRS) in November and December and become effective on January 1, 2027. The new opportunity zones will present new opportunities to invest in these newly designated areas.

Existing projects require a closer look. Notice 2026-40 provides transition relief for property acquired under a working-capital plan and for ordinary-course replacement property, but the relief is conditional. For a working-capital plan, the plan must be adopted, and the business must receive at least 10% and spend at least 5% of the planned working capital, by December 31, 2026. Expansions generally do not qualify. Sponsors should review capital calls and planned expansions now, rather than assume that an existing project’s qualification will carry over to its next phase.

Structuring to capture the new benefits

The enhanced rural incentive may shape the investments an investor pursues and how the fund is designed, but the 30% basis increase is not automatic. The fund itself must satisfy the requirements for a qualified rural opportunity fund, and the location of a single project does not, by itself, establish that the fund qualifies.

Operating businesses offer a different, and potentially valuable, opportunity: pairing QOZ benefits with the qualified small business stock (QSBS) exclusion under Section 1202. The two regimes do not move in lockstep, and qualifying under one does not ensure qualifying under the other. Entity choice and the manner in which investors hold their interests will also affect how losses and distributions are treated. These decisions are best made before the structure is in place.

Contribution and construction schedules should be coordinated with the working-capital rules, and planned distributions, including debt-financed distributions, should be tested against investor basis and the inclusion-event rules.

Expanded reporting

The OBBBA also significantly expands information reporting for QOFs and qualified opportunity zone businesses (QOZBs). Proposed regulations published on September 11, 2026, would require, among other things, census-tract-level reporting on property, employment, and housing units, along with annual QOZB statements signed under penalties of perjury. Comments are due October 26, 2026. Because much of that information sits with the underlying businesses, QOF and QOZB agreements should include the necessary information rights and specify who will collect and report it.

For questions about how QOZ 2.0 affects a particular investment or project, please contact either of the authors or your regular McDermott Will & Schulte lawyer.