OZ Transition Period

How Does the OZ 1.0 to OZ 2.0 Transition Work?

The single rule governing the transition: the date the capital is invested into the QOF determines which set of rules applies — not the date the gain was realized. Capital invested on or before December 31, 2026 is OZ 1.0. Capital invested on or after January 1, 2027 is OZ 2.0.

What Gets Grandfathered

Investors with existing OZ 1.0 positions do not lose their benefits when OZ 2.0 takes effect:

• The 10-year appreciation exclusion continues to apply
• The FMV basis step-up at exit continues to apply
• Depreciation recapture elimination continues to apply
• Zone designation status is locked in at the time of investment — the 2027 map redesignation does not retroactively disqualify existing investments

The only thing that changes on December 31, 2026 for OZ 1.0 investors is that the deferred gain is recognized and tax becomes due in April 2027.

The Two-Year Dual-Map Overlap

A frequently misunderstood feature of the transition: the original 2018 zone map does not immediately expire when OZ 2.0 launches.

• OZ 2.0 map: effective January 1, 2027
• OZ 1.0 map: remains valid for new investments through December 31, 2028

From January 2027 through December 2028, both maps coexist. A project in a tract that appears on the original 2018 map but is removed from the 2027 OZ 2.0 map can still attract new OZ investment under OZ 1.0 rules — as long as the investment is made before December 31, 2028.

For sponsors evaluating sites in late 2026 or 2027, verifying status on both maps is essential.

True/False: Common Misconceptions About the Transition

"A gain realized in 2026 automatically gets OZ 2.0 benefits." FALSE. The investment date — when capital is funded into the QOF — controls which rules apply. A 2026 gain funded into a QOF in 2026 is OZ 1.0.

"If my zone is removed from the 2027 map, I lose my tax benefits." FALSE. Existing investments are grandfathered based on the zone's status on the date of investment.

"The 10-year appreciation exclusion still applies to OZ 1.0 investments." TRUE. The 10-year exclusion is not affected by the transition. OZ 1.0 investors who hold for 10 years still exit tax-free.

"The original 2018 zone map expires on January 1, 2027." FALSE. The original map remains valid for new investments through December 31, 2028. There is a two-year overlap.