When is gain deferred in an opportunity fund before 2027 taxed?

On the return for the tax year that contains December 31, 2026, unless you sell the fund interest or trigger inclusion sooner. Notice 2026-40 also says that amount cannot be deferred a second time under the post-2026 rules.

Can a business in a 2018 opportunity zone still buy qualifying equipment after 2026?

Only in two cases. Purchases in the ordinary course that replace or modernize existing property can qualify, and so can property bought under a written working capital plan that was adopted, at least 10 percent funded and at least 5 percent spent by December 31, 2026; purchases made to expand cannot.

When do the original opportunity zones expire?

Most zones designated in 2018 expire December 31, 2028, and the Puerto Rico zones expire December 31, 2027.

How long is gain deferred for opportunity fund investments made in 2027 or later?

Five years from the date of the investment, or earlier if you sell. Holding for five years adds 10 percent of the deferred gain to your basis, or 30 percent for a qualified rural opportunity fund.

Can I put a 2026 capital gain into an opportunity fund in 2027?

Yes, according to the notice, as long as you meet the timing rules, which generally give you 180 days from the sale. An investment made on or after January 1, 2027 is then governed by the new rules.

When will the new opportunity zone map be decided?

Governors nominate tracts under Rev. Proc. 2026-14 for zones that take effect January 1, 2027. The 2025 law starts the 90-day nomination window on July 1, 2026, and a governor can request a 30-day extension.

Opportunity Zone Rules Are Changing in 2027. The IRS Just Said What Happens to Businesses Already There

Your to-do list

Check whether your business's location sits in a zone designated in 2018, and whether it will be in a zone designated for the period starting January 1, 2027; the transition rules turn on that difference ^{[1, 3]}.
If you own part of a qualified opportunity fund and still have deferred gain, plan for it to be included in income for the tax year that includes December 31, 2026 ^{[1, 3]}.
If you are building out under a written working capital plan in an older zone, ask your adviser whether the plan meets the 10 percent received and 5 percent spent tests by December 31, 2026 ^{[1, 3]}.
Keep records showing whether post-2026 equipment purchases replace or modernize existing property, or expand the business; only replacements and modernization fit the older-zone exception ^[1].

Key dates

Jul12026Governors' 90-day window to nominate census tracts for the next zone map opens ^{[4, 5]}
Dec312026Deferred gain from qualifying opportunity fund investments made on or before this date is included in income; deadline for working capital plan tests in previously designated zones
Jan12027First designation period for zones certified under the One, Big, Beautiful Bill Act begins
Dec312028Most zones designated in 2018 expire (Puerto Rico zones expire December 31, 2027)

Buried in an IRS notice released June 18 is a restaurant. It sits in a census tract designated as an opportunity zone in 2018, a tract that won’t be on the new map in 2027. In 2028 it replaces its kitchen ventilation and its point-of-sale system. The IRS says that spending still counts ^[1]. If you own a business in one of the original opportunity zones, or you put a capital gain into an opportunity fund, Notice 2026-40 is the first official word on how the old program hands off to the new one ^{[1, 2]}.

What the IRS put out

Opportunity zones are low-income census tracts where investors can get tax breaks for putting capital gains to work. The investment runs through a qualified opportunity fund, a corporation or partnership that holds at least 90 percent of its assets in zone property ^[1]. The fund often invests in an operating company in the zone, which the rules call a qualified opportunity zone business ^[1].

How we got here

The program started with the 2017 tax law, Public Law 115-97, signed December 22, 2017 ^[5]. Governors got 90 days to nominate low-income tracts, capped at 25 percent of the low-income tracts in their state, and Treasury published the certified list in 2018 ^{[1, 5]}. Investors got two carrots. They could put off tax on the gain they rolled in until December 31, 2026 at the latest, and they could raise their basis by 10 percent after five years and another 5 percent after seven ^[5]. That same 2017 law barred new deferral elections for sales after 2026 ^[5]. That is why so much of this notice is about the end of this year.

The One, Big, Beautiful Bill Act, signed July 4, 2025, rewrote the program in section 70421 ^[4]. It made opportunity zones permanent, with a fresh map every 10 years. It also tightened the income test: a tract generally qualifies only if its median family income is no more than 70 percent of the area median, or it has a poverty rate of at least 20 percent and income no more than 125 percent of the median. And it dropped the rule that let some higher-income tracts in because they bordered a zone ^[4].

The original zones expire at the end of 2028, or the end of 2027 in Puerto Rico ^{[1, 3]}. Zones designated under the new law run in 10-year periods, and the first one begins January 1, 2027 and ends December 31, 2036 ^[1].

Notice 2026-40 announces that Treasury and the IRS intend to propose regulations and previews what they will say ^[1]. It is not a regulation yet. Here’s the short version:

Old investments keep the old deadline. Gain deferred through a fund investment made on or before December 31, 2026 is included in income for the tax year that includes that date, if no earlier triggering event happens. That amount can’t be deferred again under the new rules ^{[1, 3]}.
New investments get a rolling clock. For investments on or after January 1, 2027, deferred gain comes due five years after the investment, and holding five years raises your basis by 10 percent, or 30 percent for a qualified rural opportunity fund ^{[1, 3]}. Basis is roughly what you paid; a higher basis means less taxable gain.
The 10-year payoff gets a ceiling. Hold a post-2026 investment at least 10 years and you can elect to set your basis at market value, which means the growth goes untaxed. The new law measures that value when you sell or at 30 years, whichever comes first ^{[1, 4]}.
A 2026 gain can use the new rules. Gain realized on or before December 31, 2026 can still be deferred if you invest it in a fund on or after January 1, 2027, as long as the timing requirements are met. The general window is 180 days from the sale ^[1].

Can a business in an expiring opportunity zone still buy equipment?

This is where the restaurant comes in. Starting January 1, 2027, tangible property a zone business buys generally has to be bought after the start date of a zone designated under the new law. The 2018 zones have no such start date. So, as a default, equipment bought after 2026 for use in an older zone can’t count as qualifying zone property ^{[1, 3]}.

That matters because a zone business must keep at least 70 percent of its tangible property, by value, as qualifying property ^[1]. Without some relief, an older-zone business would slowly fall out of compliance just by buying new equipment.

The notice gives two exceptions ^{[1, 3]}:

Replacement and modernization. Property bought in the ordinary course of business to replace or modernize what you already have can qualify. Property bought to expand, or to move into a new line of business, cannot ^[1].
Plans already underway. Property bought under a written working capital plan can qualify if the plan was adopted by December 31, 2026, the business has received at least 10 percent of the planned funds by then, and it has spent at least 5 percent by then. Spending required under a binding agreement signed before January 1, 2027 counts as spent ^[1].

A working capital plan, for anyone who hasn’t had the pleasure, is the written plan and spending schedule that lets a zone business sit on cash while it builds. Under the existing regulations, that money has to be spent within 31 months of receipt ^[1].

The notice also lets businesses keep treating an expired zone as a zone for two tests through December 31, 2047. One test is where property is used. The other covers where income comes from: at least 50 percent of gross income from active business in the zone ^{[1, 3]}.

Does this apply to you? Two hypotheticals

Hypothetical one: a diner in a 2018 zone. Say a hypothetical diner is a qualified opportunity zone business in a 2018 tract that isn’t redesignated for 2027. In 2028 it replaces worn fryers and upgrades its ordering system to keep running. Under the notice, that looks like the IRS’s own restaurant example: ordinary-course replacement and modernization, so it can qualify ^[1]. Now say the same diner buys the building next door to add a catering kitchen. The IRS’s warehouse example points the other way. An expansion bought after 2026 in an older zone that wasn’t under a qualifying written plan doesn’t qualify ^[1].

Hypothetical two: a contractor with a deferred gain. Say a hypothetical HVAC contractor sold a property years ago and put the gain into a fund. Whatever deferred gain remains lands on the contractor’s 2026 return, assuming a calendar tax year, and it can’t be rolled into a new fund ^{[1, 3]}. The contractor doesn’t lose everything, though. If the 10-year holding period and other requirements are met, the election that can wipe out tax on the investment’s growth is still available at sale ^[1]. Existing regulations protect that election for sales before January 1, 2048, even after the zone itself expires ^[1].

Congress, in its wisdom, has given this program two maps, two sets of clocks and a 21-year tail. The notice at least puts dates on all of it.

What should opportunity fund investors do before December 31, 2026?

Most small businesses never touch an opportunity fund. If you do, the useful work this year is mostly paperwork: confirm which map your location is on, write down why you are buying equipment, and get the deferred-gain number from your fund so the 2026 tax bill isn’t a surprise ^{[1, 3]}. If you sell something at a gain in the second half of 2026, ask your preparer whether investing before or after January 1, 2027 changes which rules apply to you ^[1].

If you run a zone business with a build-out on the drawing board, the year-end tests are the ones to calendar. A plan that is written down but not 10 percent funded and 5 percent spent by December 31 doesn’t get the exception ^[1].

What I’m keeping an eye on

The nomination window. Under the amended statute, governors’ 90-day window to nominate tracts opens July 1, 2026, and a governor can ask for 30 more days ^{[4, 5]}. States nominate under Rev. Proc. 2026-14, and the number of older zones in a state doesn’t count against its new cap ^[1]. Whether your tract is on that list decides which of these rules you live under.

The proposed regulations. The notice says Treasury and the IRS expect to propose rules similar to its sections 3 through 5, with final rules applying to tax years ending after the notice was issued ^[1]. I’ll compare the details when the proposal is out.

— Sally