OZ 1.0 vs OZ 2.0

Edited by Barrett Linburg Updated: September 6, 2026

Change note: Corrected direct-gain timing and transition guidance.

Key Takeaways

• The date the capital is invested into the QOF, before or after December 31, 2026, determines whether OZ 1.0 or OZ 2.0 rules apply. Not the date the gain was realized.
• OZ 1.0 (invested by December 31, 2026): 0% basis step-up, fixed deferral ending December 31, 2026, tax due April 2027.
• OZ 2.0 (invested January 1, 2027 or later): 10% basis step-up after 5 years (30% rural), rolling 5-year deferral, program made permanent.

OZ 1.0 vs. OZ 2.0: What Is the Difference?

P.L. 119-21, section 70421, enacted July 4, 2025, made structural changes to the Opportunity Zone rules. Some transition details are addressed by Notice 2026-40. The notice is announced guidance and should not be described as final regulations.

Timing is fact-specific

The date a taxpayer invests and the date its eligible gain period ends both matter. For a direct gain, the recognition date is day one and the raw calendar 180th day is 179 days later. July 5, 2026 produces December 31, 2026. July 6, 2026 produces January 1, 2027. July 6 is therefore a raw direct-gain threshold, not universal advice to wait or a rule for every K-1 owner.

Notice 2026-40 section 4.02 addresses eligible pre-2027 gain invested timely beginning January 1, 2027. A taxpayer must still establish the correct recognition date, eligible gain, and valid investment period.

Pass-through owners

If a partnership or S corporation has not deferred eligible gain, its owner may have alternatives under Treas. Reg. section 1.1400Z2(a)-1(c)(8)(iii). These generally include the entity tax-year end, or an election to use the entity gain-period start or actual unextended return due date. K-1 receipt is not the start. March 15 applies only where it is the actual relevant due date.

Deferral and basis changes

The mandatory December 31, 2026 deemed inclusion for legacy deferred gain cannot simply be rolled into a fresh deferral under Notice 2026-40 section 4.01. That inclusion does not by itself end potential ten-year treatment for appreciation in the existing QOF interest. Actual inclusion events can have different consequences. Recognition also does not necessarily equal the taxpayer's payment or estimated-tax deadline.

The 30 percent basis increase requires an investment in a qualifying rural fund. A rural project alone is not enough. Rural substantial-improvement rules are a separate property-level issue. The ten-year elections and the new valuation cap ending 30 years after investment concern post-investment value; they do not make the original deferred gain entirely tax-free.

The map transition is not blanket property qualification

A tract's continuing designation and the qualification of property or equity acquired after 2026 are different questions. Notice 2026-40 section 5.01 generally applies new applicable-start-date requirements to post-2026 acquisitions, subject to specified transition and ordinary-course exceptions. Do not infer that every legacy tract accepts unrestricted new investment through 2028.