Planning for QOZ 2.0 Before It Arrives

The OBBBA, signed into law on July 4, 2025, permanently extended the QOZ provisions first enacted under the Tax Cuts and Jobs Act of 2017 (TCJA) and enacted certain favorable changes to those rules. Although many of these changes will not take effect until Jan. 1, 2027, there are actions that should be taken prior to the effective date in order to take advantage of certain of these tax benefits.

Background

The OBBBA made a number of changes to the QOZ provisions, but the following are the key favorable tax benefits under the OBBBA:

A five-year deferral of eligible gain contributed to a qualified opportunity fund (QOF) from the date of contribution. This provision ensures the full five-year deferral that could have been cut short by the fixed recognition date under the TCJA.

Elimination of 10% of the deferred gain after holding a QOF interest for five years (30% in the case of a contribution to qualified rural opportunity funds).

Under the OBBBA, new QOZs will be designated every 10 years, beginning with the first such new designations in 2026, effective Jan. 1, 2027. The original TCJA QOZ designations expire on Dec. 31, 2028, resulting in a two-year overlap of these QOZs and those newly designated under the OBBBA. However, the IRS position is that TCJA QOZ property that was not redesignated under the OBBBA generally cannot be eligible as qualifying QOZ property after 2026.

Potential 2026 planning considerations

Contribution of pre-2027 gains

Although the expanded OBBBA tax benefits mentioned above apply only to contributions made to a QOF on or after Jan. 1, 2027, the eligible gain contributed can be recognized prior to 2027 provided the contribution is made within the required 180-day period. For gain recognized by pass-through entities, such as partnerships, the taxpayer can elect to begin the 180-day period from the date the gain is recognized, the last day of the partnership’s taxable year, or the due date for the partnership’s return (without extensions).

There are a number of potential ways to take advantage of this ability to invest 2026 gains into a QOF in 2027 to obtain the benefits under the more favorable OBBBA rules, including the following:

• Recognizing gain in 2026 that otherwise would have been avoided or delayed due to the associated tax liability, if those gains can be deferred through an investment in a QOF in 2027
• Using 2026 losses to offset 2026 gains might not be necessary to the extent some or all of those 2026 gains can be deferred through an investment in a QOF in 2027
• Determining if recognized gains in 2026 can be deferred through a contribution to a QOF in 2027, resulting in no 2026 tax on such gains

Purchase of non-redesignated QOZ property

Beginning in 2027, property in a TCJA QOZ that was not redesignated as an OBBBA QOZ generally cannot be acquired as qualifying property under the new rules (by either a QOF or its subsidiary qualified opportunity zone business (QOZB) entity). However, in Notice 2026-40, the IRS provides a safe harbor for the qualification of property acquired in non-redesignated zones after 2026. Under this safe harbor, the property is qualifying if all of the following apply:

• It is acquired by a QOZB pursuant to a qualifying written working capital safe-harbor plan relating to the use of cash, cash equivalents, or short-term debt with a 31-month period for use in a trade or business in a QOZ (including the acquisition or improvement of property) entered into by Dec. 31, 2026
• The QOZB has received at least 10% of the designated capital by Dec. 31, 2026
• The QOZB expends at least 5% of the designated capital by Dec. 31, 2026

Crowe observation

Since this safe harbor is available only if both a written plan is in place and minimum investments are made before the end of 2026, taking advantage of this safe harbor requires a plan and taking the necessary steps before the end of 2026.

Looking ahead

QOZ provisions offer taxpayers significant tax benefits and the OBBBA makes sure that these opportunities are available even after 2026. While opportunity zones have been made permanent, after 2026 there is a limited safe harbor for investments in QOZs designated under the TCJA that are not redesignated under the OBBBA. Taxpayers planning QOZ investments should consult their tax adviser to evaluate how to meet the complex requirements of these rules.