The Treasury Department (Treasury) and Internal Revenue Service (IRS) recently released Notice 2026-40, announcing the intent to issue proposed regulations and offering long-awaited transitional guidance on Qualified Opportunity Zones (QOZs) following changes enacted in the 2025 tax legislation, commonly known as the “One Big Beautiful Bill Act” (OBBBA).
Notice 2026-40 provides a clearer roadmap for how the Opportunity Zone (OZ) regime will function as the current program phases out and a revised framework takes hold beginning in 2027.
For investors, developers and fund managers, the next 18–24 months represent a critical planning window.
Opportunity Zones Transition: From 2026 Deadline to the New Post-2026 Rules
Under the original OZ rules, taxpayers could defer eligible gains by reinvesting them into Qualified Opportunity Funds (QOFs), with a key milestone looming: December 31, 2026, when deferred gains generally become taxable for investments made under the original deferral regime and still held at that date.
Notice 2026-40 reinforces that deadline for existing investments, but it also outlines a significant shift for investments made after 2026.
Beginning in 2027, gain deferral remains available, but the structure of the deferral changes meaningfully. For qualifying investments made on or after January 1, 2027, the deferred gain must be included in income in the taxable year that contains the earliest of:
- The date the qualifying investment (or portion of it) is sold or exchanged,
- The date an inclusion event other than a sale or exchange occurs, or
- The date that is five years after the date the qualifying investment was made.
This is a fixed five-year clock tied to the date of each investment, not a universally applicable rolling or continuously renewing period. An investor who makes a qualifying investment on March 1, 2027, will recognize the deferred gain on March 1, 2032 (absent an earlier sale or inclusion event). An investor who waits and invests on October 15, 2029, will recognize the deferred gain on October 15, 2034.
Practically, this means investors can make qualifying investments at any point after December 31, 2026, and know with certainty when the deferred gain will be recognized as income — five years from the date of each investment. There is no statutory sunset on the new QOF investments under the OBBBA; however, investors who deploy capital earlier in the new designation period will generally have more runway before their five-year inclusion date arrives.
At the five-year inclusion date, a basis adjustment reduces the gain actually recognized: a 10% basis step-up for standard QOF investments, or a 30% basis step-up for qualified rural opportunity fund investments (defined under §1400Z-2(b)(2)(C)). The step-up is automatic once the holding-period requirement is met.
What This Means for Your Investment Timeline
Because the inclusion date moves with each investment, timing strategy shifts from "beat the 2026 deadline" to "stage capital deliberately." Investors and fund managers can plan around predictable, investment-specific recognition dates rather than a single statutory cliff.
A Planning Bridge for Late-2026 Gains
Notice 2026-40 confirms a valuable and easy-to-miss planning opportunity for gains realized late in 2026. Eligible gains realized on, before, or after December 31, 2026, can be deferred by making a timely qualifying investment in a QOF on or after January 1, 2027, provided the standard 180-day investment window is met.
In practice, this means a gain triggered in the second half of 2026 (or earlier in the case of gain triggered by a passthrough entity) can be invested into a post-2026 QOF and pulled into the new regime, capturing the five-year deferral, the 10% basis step-up (or 30% for qualified rural opportunity funds) and the post-2026 FMV election rules, rather than the legacy December 31, 2026 inclusion date. Further, from a tax perspective, it behooves an investor to wait until 2027 to make the investment, as a 2026 deployment would provide neither a deferral nor a step-up benefit. However, economic considerations may render waiting an unavailable option.
Investors should also confirm whether the applicable zone will qualify under the new regime, as a zone that qualified under the original program may not qualify under Opportunity Zones 2.0. In some cases, closing in late 2026 may be preferred, provided the zone qualification analysis supports that approach. For investors weighing whether to close a transaction in late 2026 or accelerate into early 2027, this flexibility matters. The 180-day window, not the calendar year of the gain, drives eligibility for the new framework.
It is important to note that, as anticipated, the notice makes clear that gains from the December 31, 2026, recognition event for investments made and still held under the original regime are not eligible for deferral under the new regime.
A New 30-year Ceiling on the Fair Market Value Election
A consequential and often overlooked change under OBBBA is a new outer limit on the Section 1400Z-2(c) fair market value (FMV) basis election.
Under the original rules, an investor holding a qualifying investment for at least 10 years could step their basis up to FMV on the date of sale, through 2047. For qualifying investments made after December 31, 2026, the step-up occurs on the earlier of the date of sale or exchange, or the date 30 years after the investment was made.
The FMV election now has a 30-year ceiling. Appreciation accruing after that 30-year mark falls outside the election, effectively locking in the investor's basis at the 30-year FMV for measuring future gain.
New Opportunity Zones Timeline: What Changes After 2026
The notice also clarifies how present and future OZs will be designated.
For zones certified after the 2025 legislation:
- The designation period begins on January 1 following certification,
- And runs for a new 10-year period (e.g., 2027–2036 for zones designated in 2026).
For existing zones, expiration dates are as follows:
- December 31, 2027 — Puerto Rico QOZs (deemed designated under prior § 1400Z-1(b)(3))
- December 31, 2028 — all other previously designated QOZs
What This Means for Capital Deployment Strategy
There will be a temporary overlap where:
- Legacy zones are winding down, and
- A new generation of zones is coming online.
This creates complexity and opportunity for groups actively deploying capital.
Opportunity Zone Property Rules: Expansion vs. Replacement After 2026
One of the most impactful elements of the guidance is how it treats property acquired after 2026 in previously designated QOZs.
As a general rule, property located in a previously designated zone acquired after December 31, 2026, may not qualify as OZ business property, unless it is associated with a newly designated zone or qualifies under specific transition relief provisions described in the notice.
The notice draws a clear line between two types of activity:
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Replacement and modernization (may qualify)
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Expansion activity (cannot qualify unless a §5.01(2)/(3) exception applies)
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What This Means for Real Estate Developers and Operators
For real estate developers and operating businesses, this distinction between expansion activity and replacement and modernization activity is critical. Projects structured as expansions may face limitations under the transitional rules and may incur penalties at the QOF level in many scenarios, particularly in previously designated zones, while maintenance and modernization activity can continue to qualify in certain circumstances.
Working Capital Safe Harbor Rules: Planning for Opportunity Zones Before 2027
The guidance places significant emphasis on the working capital safe harbor, which allows businesses to stage development capital under a written plan, and it is important to note that a single business may apply the working capital safe harbor multiple times independently.
To preserve eligibility for projects continuing after 2026, the notice provides that projects must meet several conditions to continue qualifying, including:
- A qualifying written development plan be in place by December 31, 2026.
- Meaningful capital deployment before that date: specifically, the QOZB must have received at least 10% of total estimated working capital assets and expended at least 5% of those assets by December 31, 2026 (binding agreements executed before January 1, 2027, count toward the 5% expenditure threshold).
- Ongoing execution aligned with that plan, substantially consistent with the documented scope or timeline.
- Start-up entities that are not yet operating as a trade or business have a separate safe harbor.
What This Means for Projects in Progress
Projects already underway can continue to qualify, but only if they are properly documented and sufficiently funded before year-end 2026. This creates a near-term urgency for developers with projects in planning or early execution stages.
What Happens When Opportunity Zones Expire? Safe Harbor Rules Explained
The notice also addresses a common concern: what happens when a zone’s designation expires?
Importantly, it signals that:
- Investments that meet qualification requirements before expiration can continue to benefit from OZ treatment by preserving the FMV step up.
- The IRS anticipates that forthcoming regulations will include safe harbors allowing businesses and property to continue being treated as located in a QOZ for certain purposes through 2047.
What This Means for Existing OZ Investors
This provides long-term certainty for investors who have already deployed capital and are planning to meet the 10-year holding period required for full tax benefits.
Key Takeaways for Investors and Developers
Based on the guidance, several strategic themes emerge.
1. The 2026 Deadline Still Matters, Just in a Different Way
For existing investments, the original December 31, 2026, inclusion date remains a critical milestone.
2. Post-2026 Investments Will Operate Under a New Framework
The shift to a rolling five-year recognition event changes how investors think about entry timing and exit strategy.
3. Project Structure Will Be More Important Than Ever
The distinction between expansion and replacement activity could determine whether investments incur penalties going forward.
4. Documentation and Early Execution Are Critical
Projects relying on working capital safe harbors must have plans and meaningful capital deployment in place before the end of 2026.
5. Long-term Certainty Remains Intact for Existing Capital
Anticipated safe harbor provisions offer continued support for assets and businesses through the extended lifecycle of OZ investments.
What’s Next for Opportunity Zones and IRS Guidance
While Notice 2026-40 provides long-awaited clarity, it is not the final word. The IRS has indicated that proposed regulations are forthcoming.
The OZ program is entering a new phase — one that requires stakeholders to manage legacy investments through December 2026 while simultaneously positioning for a restructured framework taking hold in 2027.
Stakeholders who act now will be better positioned than those who wait for final regulations. This means documenting projects, deploying capital, and stress-testing investment structures against the new rules.
How We Can Help
Whether you need to assess working capital safe harbor eligibility before year-end, model exit timing on existing QOF positions, or evaluate how the expansion vs. replacement distinction affects a planned project, Cherry Bekaert’s OZ advisors can help you move from understanding the rules to acting on them.
With the December 31, 2026, recognition event approaching, now is the time to act. Connect with our team to get a clear plan in place.
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