Since the launch of the US incentive programme for Qualified Opportunity Funds (QOFs) in 2017, around 25,000 investors, including 21,000 individuals and 4,000 corporate entities, have invested more than $100 billion in realised capital gains. At the end of 2026, the initial tax deferral under the first programme phase (OZ 1.0) will expire as scheduled. At the same time, the successor programme OZ 2.0 will come into force for new investments from 1 January. As direct transfers between structures are generally impermissible, the transition requires precise tax preparation on the part of funds and project companies.
Deferred gains due on the 2026 cut-off date
Investors in the first programme generation must recognise their previously deferred gains for tax purposes as of 31 December 2026. The assessment base is the lower of the originally deferred gain and the fair market value of the investment on the reference date. In doing so, investors can claim the acquired basis step-up resulting from a five- or seven-year holding period. This amounts to 15 per cent for capital contributed by 31 December 2019, and 10 per cent for inflows between 1 January 2020 and 31 December 2021.
For an investor who invested a gain of $1 million on 1 December 2019 and whose holding is currently valued at $700,000, the applicable amount is $700,000 less the 15 per cent basis increase of $150,000, resulting in a taxable gain of $550,000 for 2026. Methods such as cost segregation studies or offsetting ongoing losses can serve to reduce the tax liability. However, necessary valuation discounts must be soundly documented and cannot be derived solely from general project delays.
Restrictions under Notice 2026-40 and requirements for OZ 2.0
Under the guidance of Notice 2026-40, real estate acquired after 31 December 2026 in previously designated incentive areas will generally no longer qualify as eligible business property. Exceptions exist for projects covered by a written working-capital plan, as well as for routine maintenance or modernisation measures. Uncompleted existing projects must demonstrate that at least 10 per cent of the total budget has flowed into the company and at least 5 per cent of the funds have been expended or contractually committed.
For investments from 1 January, OZ 2.0 introduces rolling deferral periods. The gain only becomes taxable after five years or upon an earlier exit, accompanied by a basis step-up of 10 per cent, or 30 per cent in the case of qualified rural funds. In addition, the threshold for substantial improvement investments drops from 100 per cent to 50 per cent of the building's book value. Investors have a 180-day window from the realisation event to reinvest proceeds, whereby partnership deadlines can be utilised strategically to roll 2026 gains over into the more advantageous 2027 regulatory framework.
