Tax Insight

IRS provides transitional guidance on Opportunity Zone changes

Insight
5 minute read
June 25, 2026

What happened?

The Treasury Department and the IRS released Notice 2026-40 on June 18, 2026, announcing their intent to issue proposed regulations addressing qualified opportunity zones (QOZs) under Sections 1400Z-1 and 1400Z-2, as amended by the One Big Beautiful Bill Act (OBBBA). The notice provides transitional guidance related to qualifying investments, QOZ designations, investor deferral elections, post-2026 property acquisitions, and compliance testing after existing QOZ designations expire.

Why is it relevant?

Notice 2026-40 provides important guidance for taxpayers with existing QOF investments, investors considering transactions near year-end 2026, and qualified opportunity funds (QOFs) and qualified opportunity zone businesses (QOZBs) with projects located in currently designated QOZs that may not be redesignated under the permanent QOZ tax incentive. The notice clarifies that capital gains deferred under the original OZ program that are required to be recognized on December 31, 2026 may not be re-deferred, while certain other gains realized in 2026 or triggered by inclusion events may be eligible for the revised post-2026 QOZ benefits if timely invested in a QOF on or after January 1, 2027.

Actions to consider

Taxpayers should review existing QOF investments and planned QOZ projects in light of the transition rules described in Notice 2026-40. Investors with eligible gains realized in 2026 should consider the timing of QOF investments, while QOFs and QOZBs should assess whether post-2026 property acquisitions in existing QOZs may qualify under the working capital safe harbor or ordinary course replacement property exceptions. Sponsors also should evaluate whether current projects will satisfy the requirements for continued location-based compliance after the applicable QOZ designation period expires.

QOZBs with multi-phase projects in existing QOZs should take note of the December 31, 2026 deadlines embedded in the working capital safe harbor transition rule, as the written plan must be adopted, at least 10% of total estimated working capital assets must be received, and at least 5% must be expended (or subject to a binding commitment) by that date. Projects currently in process that have not satisfied these thresholds may lose access to the working capital transition rule, with significant consequences for QOZ business property (QOZBP) qualification on future property acquisitions.