OZ Glossary

Last updated: March 2026

OZ Glossary: Every Term Defined

Basis Step-Up

A permanent increase in the investor's tax basis on their original deferred gain. Under OZ 2.0, a 10% step-up applies after a five-year hold for standard zones and a 30% step-up for rural zones via a QROF. Under OZ 1.0 rules in 2026, the step-up is 0%.

Decennial Redesignation

The process by which OZ zone maps are refreshed every 10 years based on updated census data. Under OZ 2.0, the first redesignation occurs in 2027. New eligibility criteria apply (70% MFI, 125% AMI cap, no contiguous zones).

Depreciation Recapture

The tax owed on previously claimed depreciation deductions when a property is sold. In conventional real estate, this is taxed at up to 25%. In a qualifying 10-year OZ exit, depreciation recapture is eliminated entirely through the FMV basis step-up election.

FMV Election (Fair Market Value Election)

The election available to investors who hold a QOF interest for at least 10 years to step up their tax basis to the fair market value on the date of sale. This eliminates all federal capital gains tax on appreciation and all depreciation recapture. Under OZ 2.0, this election is available for up to 30 years from the investment date.

Inclusion Event

Any event that triggers immediate recognition of the investor's deferred capital gain before the scheduled deferral date. Includes: sale of the QOF interest, certain fund distributions, fund liquidation, or entity structure changes that cause loss of QOF status. An early inclusion event also forfeits the 10-year appreciation exclusion if the holding period has not been met.

OBBBA

One Big Beautiful Bill Act. Enacted 2025. Made the Opportunity Zone program permanent, introduced OZ 2.0 mechanics (effective January 1, 2027), created QROF, tightened zone eligibility, and established mandatory reporting requirements.

Phantom Tax

The cash tax liability on the original deferred capital gain that OZ investors must pay at the end of the deferral period — without receiving corresponding cash distributions from the fund. Under OZ 1.0, this bill comes due in April 2027.

QOF (Qualified Opportunity Fund)

A corporation or partnership that self-certifies as a QOF by filing IRS Form 8996 and holds at least 90% of its assets in qualifying OZ property. Tested semi-annually on June 30 and December 31.

QOZB (Qualified Opportunity Zone Business)

A subsidiary entity owned by a QOF that directly operates the OZ business or holds OZ real estate. Must pass the 70% tangible property test, the 50% gross income test, the 40% intangible property test, and maintain cash below 5% of assets (subject to WCSH protection). The QOZB layer — not the QOF — can access the Working Capital Safe Harbor.

QOZBP (Qualified Opportunity Zone Business Property)

Tangible property (real estate, equipment, machinery) used in a trade or business located within a designated OZ and acquired after December 31, 2017. Must either meet the original use test or the substantial improvement test.

QROF (Qualified Rural Opportunity Fund)

A QOF that holds at least 90% of its assets in rural OZ properties, as defined under OZ 2.0. Investors in a QROF receive a 30% basis step-up after five years (vs. 10% in standard OZ) and benefit from the 50% substantial improvement threshold.

Rolling Five-Year Deferral

The OZ 2.0 deferral structure. Instead of a fixed December 31, 2026 recognition date, investors who fund a QOF on or after January 1, 2027 defer their gain for five years from the investment date. A QOF funded February 1, 2027 has a deferral date of February 1, 2032.

Substantial Improvement Test

The test applied to existing buildings acquired by a QOF or QOZB. The fund must invest improvements equal to 100% of the building's adjusted basis (excluding land) within 30 months for urban zones, or 50% for rural zones under OZ 2.0. Original use property (new construction or long-vacant buildings) is exempt.

Two-Tier Structure

The industry-standard OZ fund architecture. A QOF holds equity in a subsidiary QOZB, which holds the real estate or operating business. The QOZB layer is critical because it — and only it — can access the Working Capital Safe Harbor.

WCSH (Working Capital Safe Harbor)

The IRS provision allowing a QOZB to hold cash for up to 31 months (or 62 months with sequential infusions) without violating the 5% non-qualified financial property limit. Requires a written plan and written deployment schedule maintained continuously.

Zone Map

The map of designated OZ census tracts. OZ 1.0 map: 8,764 tracts, valid through December 31, 2028. OZ 2.0 map: approximately 6,544 tracts, effective January 1, 2027. Both maps are simultaneously valid from January 2027 through December 2028.

Form 8949

The IRS form used to report capital gains and losses. In an OZ context, Form 8949 is where the investor elects to defer a capital gain by adding a deferral code in Column (f). It is also the form on which the deferred gain reappears when the deferral period ends. Full tax forms guide

Form 8996

The fund-level IRS form filed by a QOF to prove it met the 90% asset test on both semi-annual testing dates. Under OZ 2.0, Form 8996 also requires reporting of NAICS codes, residential unit counts, and FTE employees. Full tax forms guide

Form 8997

The annual IRS form filed by individual OZ investors to track their QOF investments over time. Reports investment amounts, dates, changes during the year, and total deferred gain outstanding. Failure to file triggers a rebuttable presumption that an inclusion event occurred. Full tax forms guide

K-1 (OZ)

The tax information form issued to investors by the QOF. An OZ K-1 differs from a standard real estate K-1 because the investor's starting tax basis is $0 (since deferred capital gains were invested). Basis for depreciation comes from allocated qualified non-recourse debt. Full K-1 guide

Section 6039K

The IRC section created by the OBBBA requiring QOFs to file expanded annual returns detailing NAICS codes, residential units, FTE employees, community impact, census tracts, and investor dispositions. Penalties for non-compliance start at $500/day. Full reporting requirements

Section 6039L

The IRC section requiring QOZBs to furnish written statements to their QOF investors containing operational data needed for the QOF's expanded annual reporting under Section 6039K. Full reporting requirements

Primary Sources