The Opportunity Zone basis step-up: 10% and 30%

The step-up is a statutory increase in your basis in a Qualified Opportunity Fund (QOF) investment after you have held it five years, equal to 10% of the deferred gain, or 30% if the fund is a Qualified Rural Opportunity Fund (QROF).^1,2

When you defer a gain by investing it in a QOF, your basis in that investment starts at zero.¹ Basis is what the tax law subtracts from value to measure gain, so a zero basis means the full deferred gain would be taxed when it is included. The step-up raises that basis before the inclusion at year 5, so less gain is taxed. It applies to amounts invested in QOFs after December 31, 2026.³

There is one step-up date. The rules for these investments do not add a further increase for a longer hold; the next benefit is the 10-year exclusion of appreciation, covered in the 10-year hold.⁴

At a 23.8% federal rate, the 10% step-up saves 2.38% of the deferred gain and the 30% step-up saves 7.14%, paid five years after the investment.⁵

Assumptions: long-term capital gain taxed at the 20% top federal rate plus the 3.8% net investment income tax (23.8%), no state tax, no change in rates, and a QOF investment worth at least the deferred gain at year 5. These figures are illustrative.

The same math at a different size: $500,000 of deferred gain in a QROF held five years receives a $150,000 basis increase (30%), so tax applies to $350,000.⁵ For a full projection that includes the 10-year exclusion, see the tax savings worked example.

A QROF is a QOF that holds at least 90% of its assets in Opportunity Zone property located in Qualified Opportunity Zones composed entirely of rural areas.^6,7

The statute defines a rural area as any area other than a city or town with a population greater than 50,000 and any urbanized area contiguous and adjacent to such a city or town.⁸ A zone qualifies only if it is made up entirely of rural area; a tract that is partly urbanized does not. Under the zones in effect today, 3,309 of 8,764 are wholly rural.⁶ Treasury's eligible list for the map taking effect January 1, 2027 includes 8,334 wholly rural tracts out of 25,332.⁹

Two practical points. First, the test is at the fund level, so a multi-asset fund with one urban property and several rural ones may fail it. Second, a property in a rural zone helps a standard QOF too: the 50% substantial improvement threshold in wholly rural zones applies to any QOF or QOZB, not only a QROF.¹⁰ See what a QROF is and rural Opportunity Zones.

You lose the step-up if an inclusion event occurs before the five-year date, and its value shrinks if the investment is worth less than the deferred gain.¹¹

• Early disposition. Selling, gifting (other than to a grantor trust) or taking certain distributions from the QOF interest before year 5 triggers the deferred gain without any step-up.¹² See inclusion events.
• Falling value. The included amount is the lesser of the deferred gain or the investment's fair market value, minus basis. If $1 million of deferred gain sits in a QROF worth $800,000 at year 5, the inclusion is $800,000 minus $300,000, or $500,000.¹
• Only qualifying amounts. Money invested beyond your elected deferred gain is a separate investment with no step-up.
• Fund status. The 30% rate depends on the fund being a QROF. Detailed rules for how QROF status is established and maintained over the five years have not been issued as of October 20, 2026, so read the fund's documents and covenants closely.

After the deferred gain is included at year 5, your basis rises by the amount included, so your total basis equals the original deferred gain (assuming the value cap did not apply).¹

In the $1 million standard QOF example, basis goes from $0 to $100,000 (step-up), then to $1,000,000 (after the $900,000 inclusion). A sale between years 5 and 10 taxes only appreciation above $1,000,000. After 10 years, the fair market value election makes the step-up irrelevant to the exit, because basis is reset to value anyway.¹³ The step-up's job is to shrink the year-5 tax bill. The five-year deferral guide covers when and how that bill is paid.

Each qualifying investment has its own five-year date and its own step-up, measured on the gain deferred by that investment.¹⁴

If you invest $600,000 of one gain in March 2027 and $400,000 of another gain in September 2027, the first tranche steps up by $60,000 in March 2032 and the second by $40,000 in September 2032, each followed by its own inclusion. Form 8997, filed every year, tracks each investment's date and deferred gain, which is the record you and your preparer use to compute each step-up.¹⁴ Keep the fund's capital account statements with your Form 8997 history; the fund's records and yours should agree on every investment date. See Form 8996 and Form 8997.

Large data center campuses often sit outside cities near transmission and cheap land, so a single-asset fund that owns a campus in a wholly rural zone can be a QROF and give investors the 30% step-up.¹⁵

The same rural location halves the substantial improvement threshold if the project buys an existing building to convert, and the long life of shell, power and cooling assets suits the 10-year hold.¹⁰ The questions to ask are whether the tract is wholly rural on Treasury's list, whether the zone will be designated on the map taking effect January 1, 2027, and whether the fund can keep 90% of assets in such zones through year 5. See rural data centers and Opportunity Zones. OZ Data Centers sponsors funds of this kind.