How a data center Opportunity Zone fund works

A data center Opportunity Zone fund is a Qualified Opportunity Fund (QOF), usually an LLC taxed as a partnership, that takes investors' capital gains and invests them as equity in a Qualified Opportunity Zone Business (QOZB) that develops and operates a data center in a designated zone.^1,2 The fund self-certifies on Form 8996, and investors report their deferral on Form 8949 and Form 8997.^3,15

Why two tiers? A QOF that owns the data center directly must have 90% of its assets in qualifying property on each testing date, and a construction project holding cash would struggle with that. A QOZB is tested at 70% for tangible property and can treat cash as working capital for up to 31 months under a written plan.^2,6 See Opportunity Zone fund structures.

The life of a fund runs from capital raise, through development and operation, to a sale after at least 10 years.

1. 1.Raise. Each investor invests an amount up to their eligible gain within 180 days, generally from the sale date. For gain from a partnership or S corporation that does not elect deferral itself, the owner's period generally starts on the last day of the entity's tax year, and the owner can instead elect the entity's sale date or the due date of the entity's return (without extensions).¹²
2. 2.Fund. The QOF contributes cash to the QOZB for equity. The QOZB adopts a written plan and schedule for spending it on property in the zone.⁶
3. 3.Build. The QOZB acquires land by purchase from an unrelated party, or ground-leases it at market terms, and builds or substantially improves the facility.
4. 4.Operate. The QOZB leases capacity and provides operating services, earning at least 50% of its gross income from the active business in the zone.
5. 5.Exit. After 10 years, investors elect fair market value basis on a sale of their interests, or the fund sells assets and investors elect to exclude the gain.⁸

The QOF must hold at least 90% of its assets in qualified opportunity zone property, averaged over two semiannual testing dates, and file Form 8996 annually.^3,5

• Testing dates. Generally the last day of the first six months of the tax year and the last day of the tax year.⁵
• New cash. Cash contributed within the prior six months can be excluded from the test if held in cash, cash equivalents or short-term debt.
• Reinvestment. Proceeds from a return of capital or a sale of qualifying property count as qualifying for 12 months if reinvested, held meanwhile in cash or short-term debt. This helps the asset test only; it does not defer tax on the gain.⁴
• Penalty. A monthly penalty applies for each month the fund falls short, equal to the shortfall times the federal underpayment rate, unless the failure is due to reasonable cause.⁵
• New reporting. IRC §6039K requires an annual QOF information return. Proposed regulations of September 11, 2026 would make Form 8996 a separate information return with census-tract-level detail. The §6726 penalty is $500 per day, capped at $10,000 per return or $50,000 for funds with gross assets over $10 million.⁷

See the QOF 90% asset test and Opportunity Zone reporting requirements.

The QOZB must meet four percentage tests, keep any cash within the working capital safe harbor, avoid the excluded businesses, and conduct an active trade or business in the zone.²

• Working capital. Up to 31 months per written plan and schedule; up to 62 months with overlapping or sequential plans; tolling for government delay on completed applications (whether utility interconnection delays count is unsettled); up to 24 more months in a federally declared disaster area.⁶
• Active business. Merely entering into a triple-net lease is not the active conduct of a trade or business. A single-tenant powered shell is the main risk.^2,10
• Property. Tangible property must be acquired by purchase from an unrelated party, or leased at market terms, and must meet original use or be substantially improved within 30 months.
• Cure. Practitioner summaries describe a one-time six-month cure period for a QOZB that fails the 70% test.¹¹

For the detail, see the QOZB 70% tangible property test and managing a data center QOZB.

Models in which the QOZB operates the facility and provides services fit the active business requirement most naturally; a single-tenant triple-net powered shell fits it least.¹⁰

Funds can be single-asset (one campus, one QOZB) or multi-asset (several QOZBs). A fund that keeps at least 90% of its assets in wholly rural zones is a Qualified Rural Opportunity Fund, and its investors get a 30% step-up at five years instead of 10%.¹⁶ See single-asset vs. multi-asset funds.

Investors' Opportunity Zone capital is equity in the QOF; construction and permanent debt is usually borrowed by the QOZB.¹ Only an investment of eligible gain gets the benefits. Under §1400Z-2(e), any other amount invested is treated as a separate investment to which the deferral, step-up and 10-year exclusion do not apply.¹

• Mixed investors. Funds often accept both gain and non-gain capital. The non-gain portion is an ordinary investment and is tracked separately.
• Debt. Borrowing at the QOZB is common and can provide tax basis for depreciation in a partnership structure.
• Distributions. Distributions in excess of an investor's basis, including some debt-financed distributions, can be inclusion events that accelerate the deferred gain.¹³
• Bonus depreciation. 100% bonus depreciation is permanent for qualifying property acquired after January 19, 2025, which can create early deductions on short-life data center equipment.¹⁴

See the capital stack for an Opportunity Zone data center and debt and financing in Opportunity Zone projects.

Illustrative example. An investor realizes a $1,000,000 long-term capital gain in 2027. Assume a 23.8% federal rate (20% plus 3.8% net investment income tax), no state tax, no fees, the same doubling of value over 10 years in both cases, and no time-value adjustment for the year-5 tax.

Most of the difference comes from the 10-year exclusion, so the benefit depends on the project actually appreciating. For appreciation after the 30th anniversary, basis is fixed at fair market value on that date.¹² See a worked Opportunity Zone tax savings example.

After 10 years, investors can sell their QOF interests and elect fair market value basis, or a partnership QOF can sell the data center and investors can elect to exclude the gain, including depreciation recapture, other than on inventory.⁸ Gain on equipment the QOZB sells before year 10 is taxed normally.

Policy risk belongs in the model. Bills introduced in September 2026 would exclude data centers from Opportunity Zone benefits; they are proposals, not law.¹⁷ For a full list of questions, use the Opportunity Zone fund due diligence checklist and how to choose an Opportunity Zone sponsor.^9,14