June 19, 2026

Last week the IRS released Notice 2026-40, the long-awaited transition guidance bridging OZ
1.0 and the new OZ 2.0 regime that takes effect January 1, 2027.

These are NOT final regulations, but Treasury says we can rely on it now. And it resolves several
questions practitioners have been asking since OBBBA passed. Almost all of it pivots on a single
date, December 31, 2026:

  • Existing investors face their deferred-gain inclusion that day and cannot re-defer it,
  • The new five-year deferral program opens the day after, and,
  • In the provision already reshaping deal timelines, tangible property purchased in a 1.0
    zone after year-end generally stops qualifying as good OZ property unless a working
    capital safe harbor plan is adopted and partially funded before the end of 2026.

The IRS and Treasury intend to release proposed regulations regarding qualified opportunity
zones (QOZs) under Code Secs. 1400Z-1 and 1400Z-2, as amended by the One, Big, Beautiful Bill
Act (OBBBA) (P.L. 119-21).

Background
The number of previously designated QOZs would not affect the number of population census
tracts that are nominated to be designated as QOZs. The QOZ designation period would begin
on January 1, 2027, through December 31, 2036.

Gain Invested in QOF
At the election of a taxpayer, the gross income for that tax year would not include the
aggregate amount of gain invested by the taxpayer in a QOF. This timeline would cover the 180-
day period beginning on the date of the events that resulted in said gain.
In the case of a taxpayer (1) with eligible gain realized on, before, or after December 31, 2026;
and (2) who timely invests a corresponding amount in a QOF on or after January 1, 2027, the
taxpayer may elect to defer the recognition of that gain. The deferred gain with respect to a
qualifying investment made on or after January 1, 2027, must be included in gross income in
the tax year at issue.

Deferral Election

Taxpayers holding a qualifying investment through December 31, 2026, are required to include
any remaining deferred gain from the qualifying investment under Code Sec. 1400Z-
2(b)(2) and Reg. §1.1400Z2(b)-1(e)(3) (deemed included gain). Taxpayers that recognize
‘deemed included gain’ on December 31, 2026, would continue to hold a qualifying investment
for which an election under Code Sec. 1400Z2(a) remains in effect. The taxpayer would remain
potentially eligible to make an election under Code Sec. 1400Z-2(c) on the later sale or
exchange of that qualifying investment.

Tangible Property
The IRS noted that property acquired by a QOF or qualified opportunity zone business property
(QOZB) after December 31, 2026, would not be a QOZBP unless the (1) the property was
acquired for use in a QOZ designated after July 4, 2025, or (2) application of an exception.
Finally, tangible property acquired after December 31, 2026, could be treated as QOZBP
under Code Sec. 1400Z-2(d)(2)(D). However, it should be used in the ordinary course of its trade
or business in a previously designated QOZ to replace existing tangible business property.

 

The information contained herein is general in nature and is not intended and should not be construed as legal, accounting, or tax advice or opinion provided by Ashmore Consulting LLC to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact Ashmore Consulting LLC or another tax professional prior to taking any action based upon this information. Ashmore Consulting LLC assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.