Updated · Part of the CRE investment glossary
How an opportunity zone fund works
Qualified opportunity zones were created by the Tax Cuts and Jobs Act of 2017: census tracts nominated by states and certified by the Treasury. A QOF is an investment vehicle that files as a partnership or a corporation, self-certifies on Form 8996, and must hold at least 90% of its assets in qualified opportunity zone property, tested twice a year.
For real estate, that usually means property in a zone whose original use starts with the fund, or existing property the fund substantially improves: within a 30-month period it must add more to the building’s basis than the building’s basis at the start. For property in a zone made up entirely of a rural area, the 2025 law cut that threshold from 100% to 50%, effective July 4, 2025 (IRS Tax Tip 2026-04).
An investor gets the tax benefits by investing an eligible gain — capital gains and qualified section 1231 gains — in the QOF within 180 days and electing to defer it. Only the amount of the gain qualifies; money that was not gain can go in, but earns no opportunity-zone benefit.
The benefits under the original rules
For investments made under the original rules, the deferral lasts until the investment is sold or December 31, 2026, whichever is earlier (IRS opportunity zones FAQ). That date is now close: investors still holding a pre-2027 QOF investment include the deferred gain in income for the tax year that includes December 31, 2026 — for calendar-year taxpayers, the 2026 return — whether or not they sell.
The 10-year benefit survives that inclusion. If the investment is held at least 10 years, the investor can elect to step its basis up to fair market value when it is sold, so the appreciation inside the QOF is not taxed (Notice 2026-40). The earlier 10% and 15% basis increases at five and seven years applied only to investments made early enough to reach those holding periods before the end of 2026.
What the 2025 law changes from 2027
The One, Big, Beautiful Bill Act (Public Law 119-21, §70421) made the program ongoing. IRS Notice 2026-40 (Internal Revenue Bulletin 2026-28) summarizes the changes and says proposed regulations will follow:
- New zones: states nominate tracts again, with new designations effective January 1, 2027 for ten years (to December 31, 2036). Designations under the original rules end December 31, 2028.
- Rolling deferral: for amounts invested in a QOF after December 31, 2026, deferred gain is included in income for the tax year that includes the date five years after the investment, instead of a fixed date.
- Basis increase: a qualifying investment held at least five years gets a basis increase of 10% — 30% for a qualified rural opportunity fund.
- Old gains, new funds: gain realized on or before December 31, 2026 can be deferred by investing in a QOF on or after January 1, 2027, within the timing rules.
Worked example: an investment made in 2027
An investor realizes a $1,000,000 capital gain in March 2027 and invests $1,000,000 in a QOF in May 2027, within 180 days. The deferred gain is included in income for the tax year that includes May 2032, five years later. Simplified: holding five years adds 10% of the deferred gain to basis, so $900,000 is taxed in 2032; through a qualified rural opportunity fund, $700,000. If the investment is held ten years and sold for $1,800,000, the investor can elect to step basis up to $1,800,000, excluding the $800,000 of appreciation.
| Line | Standard QOF | Qualified rural QOF |
|---|---|---|
| Gain invested and deferred | $1,000,000 | $1,000,000 |
| Basis increase after 5 years | $100,000 | $300,000 |
| Deferred gain taxed in the 5th year | $900,000 | $700,000 |
| Appreciation excluded after 10 years | $800,000 | $800,000 |
What to watch for
Opportunity zone benefits are conditional, and the fund and the investor each carry obligations:
- The 180-day window: it starts on the date the gain is realized; gains that pass through a partnership can have other start dates — ask your CPA.
- The 90% test: a QOF that misses it owes a penalty, and a property that is not substantially improved in time does not count.
- Annual filings: the fund files Form 8996 and each investor files Form 8997 every year the investment is held.
- Changing maps: new zones take effect in 2027 and current ones end in 2028; proposed regulations on the transition are still to come.
- State tax: not every state follows the federal rules.
Primary sources
- IRS: Opportunity zones
- Internal Revenue Bulletin 2026-28: Notice 2026-40, transitional guidance on qualified opportunity zones
- IRS Tax Tip 2026-04: Opportunity zone investments in rural areas
- IRS: Opportunity zones frequently asked questions (original rules)
- IRS: About Form 8996, Qualified Opportunity Fund
- IRS: About Form 8997, investor statement of QOF investments
General information, not legal, tax or investment advice. Your operating agreement, offering documents, counsel and CPA govern your deal.