Planning for QOZ's After OBBBA

Tax News You Can Use | For Professional Advisors

In 2017, the Tax Cuts and Jobs Act (TCJA) introduced Qualified Opportunity Zone (QOZ) investing, which provides tax benefits for investing in undercapitalized communities. The provision allowed taxpayers who invested realized capital gains in a QOZ fund (QOF) to defer capital gains tax, and to exclude part of the gain from ever being taxed if all the criteria are met. Taxpayers have invested over $100 billion in QOFs since 2018. Under the TCJA, QOF investments had to be made by the end of 2026, and all deferred original gain is treated as recognized on December 31, 2026.

Along Comes OBBBA

In July 2025, the One Big Beautiful Bill Act (OBBBA) became law. OBBBA included an indefinite extension and revamp of the QOZ provisions.  The pre-OBBBA rule that ended the deferral of gain on December 31, 2026 remains in place for pre-2027 gains.  However, under OBBBA there are  new QOZs every 10 years beginning in 2027, and new rules for post 2027 QOF investments. In addition to extending the rules for QOZs/QOFs, OBBBA also introduced new Qualified Rural Opportunity Zones (ROZs) with parallel Qualified Rural Opportunity Zone Funds (ROF), which increased the tax incentive for investment by permitting the exclusion of three times the amount of capital gain as the original QOF rules did.

QOZ Tax Benefits

From the investor’s point of view, QOF investments offer three tax benefits. 

• The first is the deferral of gain on a prior transaction (original transaction) for a period of time (until December 31, 2026 for pre-2026 investments, or for five years after the investment for 2027 and beyond). In order to qualify for this treatment, the original transaction gain must be reinvested within 180 days of the original transaction, and the original transaction must be with an unrelated person.
• The second is the exclusion of part of the gain from taxation. This works by adding basis to the QOZ investment if the holding period requirement is met. For pre-2026 investments, investments held five years received a 10% increase in basis, and those held seven years received a 15% increase in basis. Beginning in 2027, there is only the 10% exclusion for QOF investments held for five years. 
• The third benefit is the exclusion from tax of all the gain earned while the donor holds the QOF investment (QOF gain) if the QOF investment is held for 10 years or more.

Don't Jump the Gun

For taxpayers making sales resulting in original transaction gain in 2026 that they would like to invest, there are a couple of twists. While it is still possible to invest in a pre-2025 QOF, the deferral of the original gain lasts only until the end of this year. For taxpayers who incur gain from an original transaction in the first half of 2026, the 180-day reinvestment period will expire before 2027 QOF investments are possible.

One possible solution is to postpone the recognition of original gain until later in 2026, leaving fewer than 180 days until 2027. This can work if the taxpayer has control over the timing of the transaction, but is not always feasible. Another option, if the property sold in the original transaction qualifies for a tax-free exchange, is to defer the recognition of gain through the exchange and then sell the new property in 2027. The later sale of the exchange property would start the 180-day reinvestment period clock running.

Howdy, Partner

An interesting fact about capital gain passed through to a taxpayer on a K-1 from a partnership or LLC (not a disregarded entity) is that it can be treated as recognized on the date of the original transaction or on the last day of the partnership’s tax year (e.g., December 31) or on the due date for the partnership’s tax return (e.g., March 15). If an asset is sold by a partnership now, the gain passes through to the partner on a K-1 and can be treated as recognized on December 31, 2026, and then the 180-day reinvestment period will provide ample opportunity to reinvest in QOF in 2027. To get this result, the asset must be owned by the partnership prior to the original transaction.

Key Takeaways

• Gain from original transactions invested in QOFs before December 31, 2026 will be recognized on December 31, 2026.
• Gain from original transactions invested in QOFs, including ROFs, in 2027 and beyond will be recognized five years after the QOF investment is made.
• Original transaction gain must be reinvested in a QOF within 180 days of the original transaction.
• Holding assets in a partnership or LLC prior to the original transaction can defer the start day for the 180-day measurement.
• For sales under consideration before July 1, 2026, consider postponing the original transaction, using other available deferral techniques like a 1031 exchange to defer recognition of gain until later in the year, or transferring assets to be sold to a partnership or LLC prior to the transaction in order to recognize gain on December 31 or potentially later.