Notice 2026-40: Two Opportunity Zone Regimes, One Hard Deadline

Key takeaways

• The December 31, 2026 inclusion date is mandatory for pre-2027 investors. Any taxpayer still holding a qualifying QOF investment through that date must include the remaining deferred gain in the taxable year that includes December 31, 2026 under prior § 1400Z-2(b)(1)(B). It cannot be re-deferred. Calculate it now and reserve the cash.
• The new 10 percent / 30 percent five-year basis step-up applies only to money invested after December 31, 2026. Under § 1400Z-2(b)(2)(B)–(C) (effective per OBBBA § 70421(c)(5)(A)), a five-year hold earns a 10 percent step-up, or 30 percent for a qualified rural opportunity fund. Pre-2027 positions get no step-up on the year-end inclusion.
• A new ten-year designation period runs January 1, 2027 through December 31, 2036. For every tract certified during 2026, the designation period begins January 1, 2027 and ends December 31, 2036 (§ 1400Z-1(e)); see Rev. Proc. 2026-14 for state nomination procedures.
• Old zones expire on December 31, 2027 (Puerto Rico) or December 31, 2028 (all others), and post-2026 property generally cannot be QOZBP in those tracts except under two transitional safe harbors keyed to a working-capital plan adopted by December 31, 2026 or ordinary-course replacement.
• Two compliance safe harbors extend through December 31, 2047, letting expired zones be treated as QOZs for the substantial-use test and the QOZB active-business tests — but only if the property or business was in place by the zone's expiration or covered by a qualifying written plan.

What Notice 2026-40 actually does

OBBBA did not extend the 2017 Opportunity Zone program; it replaced its forward-looking machinery while leaving legacy investments to wind down on the old timetable. Notice 2026-40 (June 2026) is the bridge. It announces that Treasury and the IRS intend to issue proposed regulations mirroring sections 3 through 5 of the notice, and in the meantime it tells investors, funds, and sponsors which set of rules governs which dollars.

The organizing fact is the date a qualifying investment is made. Everything turns on whether that date falls on or before December 31, 2026, or on or after January 1, 2027 — two regimes that now run in parallel and differ on inclusion timing, basis benefits, the length of the back-end exclusion, and which census tracts even count.

Because the two regimes coexist rather than replace one another cleanly, it helps to see them side by side: the legacy track that a pre-2027 investor is locked onto, and the new track that governs every dollar deployed from 2027 forward.

The legacy regime: the year-end inclusion is the headline

For gain deferred under a qualifying investment made on or before December 31, 2026, prior § 1400Z-2(b)(1)(B) requires inclusion in the taxable year that includes the earlier of an inclusion event or December 31, 2026. Section 4.01 of the notice confirms there is no escape valve: a taxpayer holding the investment through year-end 2026 recognizes the remaining deferred gain — what the notice calls "deemed included gain," measured under prior § 1400Z-2(b)(2) and § 1.1400Z2(b)-1(e)(3) — and that amount cannot be re-deferred into another QOF. This is the statutory sunset of the original deferral, not a projection.

Two points soften the blow without changing the timing. First, recognizing the deemed included gain does not terminate the investment; the § 1400Z-2(a) election remains in effect, so the taxpayer continues to hold a qualifying investment. Second, the back-end prize is still alive: a holder who satisfies the ten-year holding period can still make the § 1400Z-2(c) election to step basis up to fair market value on a later sale. Under § 1.1400Z2(c)-1(c), the ability to make that election for a pre-2027 investment is not impaired merely because the zone's designation expires, so long as the disposition occurs before January 1, 2048. The deferral is ending; the exclusion is not.

What pre-2027 investors do *not* get is any new basis benefit at the inclusion. The old 10 percent and 5 percent step-ups for five- and seven-year holds had already sunset, and the new step-ups in § 1400Z-2(b)(2)(B) apply only to amounts invested after December 31, 2026. The planning task is therefore straightforward: compute the deferred gain coming due, confirm the taxable year that includes December 31, 2026, and fund the liability.

The new regime: rolling five-year inclusion, a rural premium, and a 30-year cap

For eligible gain invested in a QOF on or after January 1, 2027, OBBBA § 70421(c) rebuilt the mechanics. The inclusion date is no longer a fixed calendar date but the earliest of a sale, another inclusion event, or five years from the date the investment was made — a rolling deferral that resets with each new vintage. A five-year hold now produces a basis increase of 10 percent of the deferred gain, and 30 percent for an investment in a qualified rural opportunity fund as defined in § 1400Z-2(b)(2)(C). The back-end exclusion under § 1400Z-2(c) is also recalibrated: for post-2026 investments held at least ten years, basis is marked to fair market value on the earlier of the sale date or the date 30 years after the investment — a generous but, for the first time, finite window.

Where the deal can be sited in a rural tract, the five-year basis step-up triples from 10 percent to 30 percent of the deferred gain — a structuring question, not a rounding error.

The map itself is new. For tracts certified during 2026, the designation period begins January 1, 2027 and ends December 31, 2036 (§ 1400Z-1(e)). The 25 percent state designation cap now applies "during any period," and the notice confirms that previously designated zones do not reduce the number of tracts a state may nominate for the 2027 round. State nomination procedures are in Rev. Proc. 2026-14.

The trap for legacy zones, and the two ways through it

Sponsors must catch this operational risk before year-end. Because a previously designated zone has no "applicable start date" under § 1400Z-1(e)(2), property acquired by a QOF or QOZB after December 31, 2026 for use in an old zone generally cannot be QOZBP. The notice provides two exceptions:

• Working-capital safe harbor (§ 5.01(2)). Property acquired after December 31, 2026 in an old zone can still qualify if it is bought under a written working-capital plan with a 31-month expenditure schedule that was *adopted on or before December 31, 2026*, the acquisitions are substantially consistent with that plan, the QOZB has received at least 10 percent of the designated working-capital assets by December 31, 2026, and has expended at least 5 percent by that date. Amounts owed under a binding agreement entered before January 1, 2027 count toward the 5 percent.
• Ordinary-course replacement (§ 5.01(3)). Tangible property bought after December 31, 2026 to replace or modernize existing business property — windows and appliances in an apartment building, a kitchen ventilation system in a restaurant — qualifies if the other § 1400Z-2(d)(2)(D) requirements are met. Expansion into new capacity or a new line of business does not.

Two further safe harbors run long. A QOF or QOZB that had qualifying property in place, or an active business underway (or a qualifying written plan), by the zone's expiration — December 31, 2027 for Puerto Rico, December 31, 2028 elsewhere — may continue to treat the expired tract as a QOZ for the substantial-use element and the QOZB active-business tests through December 31, 2047 (§ 5.02). That protects the ten-year exit on legacy deals long after the zones themselves lapse.

Frequently asked questions

I invested in a QOF in 2021 and plan to hold for ten years. What do I owe at the end of 2026?

You owe tax on the remaining deferred gain — the deemed included gain — in your taxable year that includes December 31, 2026, computed under prior § 1400Z-2(b)(2) and the regulations. There is no basis step-up reducing it, and it cannot be rolled into a new QOF. Your investment continues, and if you hold ten years you can still elect the § 1400Z-2(c) fair-market-value step-up on sale (for dispositions before January 1, 2048). Plan: model the inclusion now and set aside cash for the bill.

Can a 2026 investment get the new 30 percent rural step-up?

No. The 10 percent and 30 percent step-ups under § 1400Z-2(b)(2)(B)–(C) apply only to amounts invested after December 31, 2026 (OBBBA § 70421(c)(5)(A)). To capture the rural premium, the qualifying investment must be made on or after January 1, 2027 into a qualified rural opportunity fund.

Can my existing fund keep buying property in its 2018-designated zone in 2027?

Generally no — a previously designated zone has no applicable start date, so post-2026 acquisitions there are not QOZBP unless they fit the working-capital safe harbor (plan adopted by December 31, 2026 with the 10 percent / 5 percent funding thresholds met) or the ordinary-course replacement rule. New acquisitions for a new project belong in a tract designated for the January 1, 2027–December 31, 2036 period.

Bottom line

Two moves before December 31, 2026. First, every holder of a pre-2027 QOF position should compute the deferred-gain inclusion landing in the taxable year that includes December 31, 2026 and reserve the cash now — it is mandatory and cannot be deferred. Second, sponsors with active projects in legacy zones should paper any working-capital plan and hit the 10 percent-received / 5 percent-expended thresholds before year-end to preserve QOZBP treatment for 2027 spending. For capital being raised for 2027 and later, evaluate the rural classification for the 30 percent step-up, build offering documents around the rolling five-year inclusion and 30-year exclusion cap, and confirm the target tract carries a January 1, 2027 applicable start date. Watch for the proposed regulations, which will apply to taxable years ending after the notice's issuance.