Qualified opportunity zones and qualified opportunity funds
What to know in 2026
Andrew Seifert, JD, tax consultant, Wipfli LLP and Dannielle Lewis | April/May 2026 Footnote
Editor's note: Updated March 26, 2026
There is a lot to unpack in the One Big Beautiful Bill Act (OBBBA) and it can be easy to miss some key incentives amid the flood of sections and acronyms. We’re here to draw your attention to two related concepts: Qualified opportunity zones (QOZ) and qualified opportunity funds (QOF).
QOZ were created by Congress through the Tax Cuts and Jobs Act (2017).
[1] Nearly a decade after the creation of the QOZ program, Congress has permanently extended the QOZ program and modified the benefits through the OBBBA.
[2] Congress’ goal in the creation of QOZ is to incentivize and encourage economic growth and investment in distressed communities.
[3]
Incentives for investments in QOZs are achieved through investing in qualified opportunity funds (QOF) and holding the investment for a prescribed period of time. The incentives take the form of the temporary deferral of capital gains, partial exclusion of such capital gains from gross income to the extent invested in the QOF for a certain length of time and a permanent exclusion of post-acquisition capital gains from the sale or exchange of the QOF interest.
[4]
Before we dive in, we would like to apologize in advance for the alphabet soup that unavoidably occurs throughout this piece. The good news: by reading this article, you will have learned many new acronyms that include the letter Q.
What are qualified opportunity zones?
The term qualified opportunity zone is a designated population census tract that is a low-income community.
[5] Specifically, a QOZ is a population census tract that: 1) meets the definition of a “low-income community”
[6]; and 2) has been specifically designated as a QOZ through nomination by a state’s chief executive officer (usually the governor) and designation/certification by the Treasury secretary.
[7]
The OBBBA limits what can qualify as a QOZ by modifying the definition of “low-income community” designations to exclude high-income tracts and eliminating the exception for certain contiguous tracts.
[8] These changes will likely result in fewer QOZ designations when tracts for QOZ 2.0 are selected starting on July 1, 2026.
[9] However, in keeping rules congruent with TCJA, the OBBBA dictates that zones will have decennial designations that go into effect Jan. 1 following the date a zone is certified and designated (in this upcoming cycle, QOZ 2.0 decennial designation will begin on Jan. 1, 2027).
[10] QOZs expire on the decennial anniversary (QOZ 1.0 designations will expire Dec. 31, 2028; QOZ 2.0 on Dec. 31, 2036; QOZ 3.0 on Dec. 31, 2046; etc.).
[11] QOF 2.0 decennial designation happen before the expiration of QOZ 1.0’s decennial designation, this raises some outstanding questions for tract designation. Because there was never a QOZ 2.0 contemplated it leaves a lot of transitional questions unanswered at this point.
Tax incentives for investing in QOZ 2.0
Tax Incentives for investments made in QOZ 1.0 will be extremely limited with Dec. 31, 2026, being the last day to invest under the original program. Accordingly, this article will focus on the tax incentives for investments made in QOZ 2.0 and beyond.
The first tax incentive for investing in a QOF is that an eligible taxpayer may elect to defer some or all of eligible gains in a sale or exchange of property, to an unrelated person, if the taxpayer invests those gains in a QOF.
[12] The taxpayer generally has a 180-day period from the date of the sale or exchange to make the investment in the QOF.
[13] For example, if a taxpayer sold a tranche of stock, that would normally result in recognition of capital gains, the taxpayer has 180-days to invest some or all of those gains in a QOF and then make an election to defer the gain from recognition of income.
Note: Aside from the general rules mentioned here, there are additional timelines for QOF investments depending on their source (installment sale, sourced from a pass-through entity) that we are not covering.
The next tax incentive for investing in QOF comes through holding the investment for five years. A taxpayer’s initial basis in their qualifying investment in a QOF is zero.
[14] For qualifying investments made in QOFs on or after Jan. 1, 2027, the gain is deferred until the earlier of:
- the date the taxpayer sells or exchanges the investment; or
- the date which is five years after the date the investment in the QOF was made.[15] Assuming the taxpayer holds their investment for five years, the basis in their investment is increased to 10% (or 30% for a qualified rural opportunity fund) and the remaining deferred gain is recognized.[17]
The final tax incentive for investing in QOF comes after holding the investment for ten years. On the date of a sale or exchange of a QOF investment that has been held for at least 10 years, but not more than 30 years, a taxpayer can elect to have their basis equal the fair market value of their investment.
[17] This step up in basis equals the post-acquisition appreciation, which is measured by the sale proceeds over the taxpayer’s adjusted basis in the QOF interest (after any required recognition of the originally deferred gain). However, for a QOF investment held for 30 years or more, the step up in basis is capped at the fair market value of the QOF holding on the date that is 30 years after the date of investment.
[18]
The concept of having the five-year and 10-year incentives measured from when the initial investment was made is a welcome departure from QOZ 1.0 and will make the program more enticing to investors throughout the duration of the QOZ 2.0 designations. The concept of rolling measurement periods is an improvement from the fixed inclusion dates, which has been a main critique of QOZ 1.0.
An example of a QOF
On Jan. 1, 2027, the taxpayer sells stock to an unrelated person for a $1,000 gain and elects to defer that gain by investing $1,000 in a QOF within 180 days. The taxpayer’s basis in the initial investment in the QOF interest is $0.
After five years (Jan. 1, 2032), the taxpayer qualifies for the basis increase of 10% of the deferred gain. Basis is increased by $100 (10% × $1,000), so basis becomes $100. The taxpayer’s deferred gain must be recognized on the earlier of (a) sale of the QOF interest or (b) five years after the investment. Assuming FMV at that time is at least $1,000, the taxpayer recognizes the remaining $900 of deferred capital gain ($1,000 deferred-$100 basis increase). The taxpayer’s basis is then increased to $1,000 (the amount of the original deferred gain).
After 10 years (Jan. 1, 2037), the taxpayer sells her QOF interest for $1,500. The amount of post-acquisition appreciation is $500 ($1,500-$1,000). If the taxpayer elects, the basis of the QOF interest is stepped up to its FMV at the time of the sale ($1,500) and the $500 of post-acquisition appreciation is excluded from income.
[19]
The bright future of QOZs
The OBBBA’s permanent extension and modernization of QOZs is largely a positive development. It advances the policy goal of encouraging economic growth and investment in distressed communities by improving the tax incentives of QOZ 1.0. In addition, by making QOZs permanent taxpayers now have more confidence in planning for and deploying capital to QOZs.
Dannielle Lewis, CPA, MBT, is a tax partner at Wipfli Advisory LLC focused on construction and real estate. A nationally recognized specialist in Qualified Opportunity Zones, she leads the firm’s opportunity zone practice and provides comprehensive planning and compliance for opportunity zone funds and investors. An MNCPA member, Dannielle frequently presents on opportunity zone and transactional tax topics. You may reach her at dlewis@wipfli.com or 952-548-3334.
Andrew Seifert, JD, is a partner and leader of the national tax office of Wipfli Advisory LLC, where he assists clients with complex tax issues, transactional advising and overall business consulting. An MNCPA member, Andrew frequently presents on tax-related matters. You may reach him at aseifert@wipfli.com or 651-766-2856.
Footnotes
[1] Pub. L. No. 115-97, § 13823(a), enacted Dec. 22, 2017.
[2] Pub. L. No. 119-21, § 70421, enacted July 4, 2025.
[3] Joint Comm. on Taxation, 115th Cong., General Explanation of Public Law 115-97 at 316 (2018).
[4] d. at 316-317.
[5] IRC § 1400Z-1(a).
[6] IRC § 1400Z-1(c).
[7] IRC § 1400Z-1(b).
[8] Pub. L. No. 119-21, § 70421(b)(2).
[9] IRC § 1400Z-1(c)(2)(C)(i).
[10] IRC § 1400Z-1(e)(2).
[11] IRC § 1400Z-1(e)(1).
[12] IRC § 1400Z-2(a)(1).
[13] IRC § 1400Z-2(a)(1)(A).
[14] IRC § 1400Z-2(b)(2)(B)(i).
[15] IRC § 1400Z-2(b)(1).
[16] IRC § 1400Z-2(b)(2)(B)(iii) and IRC § 1400Z-2(b)(1).
[17] IRC § 1400Z-2(c)(A).
[18] IRC § 1400Z-2(c)(B).
[19] Example adapted from Joint Comm. on Taxation, supra note 3, at 320-321.
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