Qualified Opportunity Zones (QOZ) — Capital Gains Tax Incentive (USA)

Defer and reduce US capital gains tax by reinvesting gains in a Qualified Opportunity Fund, and pay no federal tax on the new growth after a 10-year hold — made permanent by the One Big Beautiful Bill Act, with new zones from 1 January 2027.

• •Issued by: Government of the United States · Department of the Treasury · Internal Revenue Service
• •Law: Internal Revenue Code §§ 1400Z-1 & 1400Z-2, as amended by OBBBA § 70421 (P.L. 119-21, 04/07/2025)
• •New-zone guidance: Rev. Proc. 2026-14, effective 06/04/2026
• •Nodal Agencies: IRS, US Treasury & CDFI Fund

Qualified Opportunity Zones are low-income census tracts chosen by state governors and certified by the US Treasury. A person or company that sells an asset at a profit can put that profit (capital gain) into a Qualified Opportunity Fund (QOF) that invests in these zones, and get three tax benefits:

Old Rules vs New Rules — decided by the date of investment in the QOF

A. The Investor

• •Any taxpayer with an eligible capital gain — individuals, companies, partnerships, trusts and estates.
• •The gain (not just any cash) must be invested in a QOF within 180 days.
• •The investment must be an equity interest (shares or partnership interest) in the QOF — not a loan.

B. The Fund (QOF)

• •Organised as a corporation or partnership to invest in Qualified Opportunity Zone Property.
• •Holds at least 90% of its assets in Qualified Opportunity Zone Property: shares or partnership interests in a Qualified Opportunity Zone Business, or business property used in a zone.
• •Qualified Rural Opportunity Fund (QROF): a QOF holding at least 90% of its assets in zones made up entirely of rural areas — for investments after 31/12/2026.

C. The Zone — New Test for 2027 Zones (Rev. Proc. 2026-14)

• •25,332 tracts are eligible for nomination as 2027 zones, of which 8,334 are entirely rural.
• •Each state may designate up to 25% of its low-income tracts (rounded up); a state with fewer than 100 may designate up to 25.
• •Neighbouring tracts that are not low-income themselves can no longer be added.
• •Rural area = anywhere other than a city or town with over 50,000 people and the urbanised area next to it (see IRS Notice 2025-50).

A. Basis Step-Up on the Original Gain

B. Worked Example — $1,000,000 Gain, OZ 2.0, Rural Fund

For comparison, $1,200,000 of growth in an ordinary investment would face federal capital gains tax of 20%–23.8%, roughly $240,000–$285,600.

C. Other Benefits

• •Lower improvement requirement for rural zones — an existing building in a rural zone needs improvements of 50% of its basis instead of 100% (from 04/07/2025).
• •Depreciation recapture can also be eliminated on exit after 10 years, when the investment is properly structured.
• •No cap on the amount of gain that can be invested.

• •180-day rule — the gain must reach the QOF within 180 days of being realised (partnership/K-1 gains have more flexible start dates).
• •Year-5 tax is compulsory — under OZ 2.0, tax on the original gain is due at the 5th anniversary in cash, even if the QOF investment is not sold.
• •10-year hold — the tax-free growth applies only if the QOF investment is held for at least 10 years.
• •90% asset test — the QOF must keep at least 90% of its assets in zone property, measured on set dates; failure brings penalties.
• •New or substantially improved property — zone property must be first used in the zone by the QOF, or substantially improved (generally doubling the building's basis within 30 months; 50% in rural zones). Buying and holding land or an existing building does not qualify.
• •Use in the zone — substantially all of the property's use must be in a zone for substantially all of the holding period.
• •OZ 1.0 vs 2.0 timing — the date of investment in the QOF decides which rules apply.

For Investors

• •Step 1 — Realise a gain: Sell an asset such as shares, property or a business at a profit.
• •Step 2 — Pick a QOF: Choose a fund investing in a designated zone (or set one up).
• •Step 3 — Invest within 180 days: Put the gain amount into the QOF as equity.
• •Step 4 — Elect deferral: Report the election on Form 8949 with that year's tax return.
• •Step 5 — File yearly: Submit Form 8997 every year while the investment is held.
• •Step 6 — Year 5: Pay tax on the original gain, reduced by the 10% / 30% step-up.
• •Step 7 — Year 10 or later: Sell and elect to step the basis up to fair market value, so the new growth is not taxed.

For the 2027 Zone Designation (Rev. Proc. 2026-14)

• •Step 1: Treasury publishes the list of eligible low-income tracts (Appendix on irs.gov).
• •Step 2: Each state governor nominates tracts through Treasury's online Nomination Tool during the 90-day window from 01/07/2026 (extendable by 30 days).
• •Step 3: Treasury certifies and designates the tracts within 30 days of receiving the nomination (extendable by 30 days).
• •Step 4: New zones take effect on 01/01/2027 for 10 years.

Internal Revenue Code §§ 1400Z-1 and 1400Z-2 as amended by § 70421 of Public Law 119-21 (One, Big, Beautiful Bill Act, 4 July 2025); IRS Rev. Proc. 2026-14 (effective 6 April 2026); IRS Notice 2025-50.