Opportunity Zones: the 25 most common questions answered

An Opportunity Zone is a low-income census tract designated by its governor and certified by Treasury, and investing a capital gain in a fund that builds or runs businesses there earns federal tax benefits. The rules live in IRC §§1400Z-1 and 1400Z-2, as amended by Public Law 119-21 (signed July 4, 2025), and in the Treasury regulations at 26 CFR 1.1400Z2.^1,2

1. What is a Qualified Opportunity Zone?

A census tract that met the statutory low-income test and was nominated by its state's governor and certified by Treasury. A tract qualifies as a low-income community if its median family income is no more than 70% of the area median, or if its poverty rate is at least 20% and its median family income is no more than 125% of the area median.³ See what an Opportunity Zone is.

2. What is a Qualified Opportunity Fund (QOF)?

A QOF is a corporation or partnership organized to invest in Opportunity Zone property that self-certifies on IRS Form 8996 and holds at least 90% of its assets in qualifying property, measured on two semiannual testing dates.⁴ More in what a QOF is.

3. What is a Qualified Opportunity Zone Business (QOZB)?

A QOZB is an operating company, usually owned by a QOF, that meets its own tests: at least 70% of its tangible property is qualifying zone property, at least 50% of its gross income comes from active business in the zone, at least 40% of its intangibles are used there, less than 5% of its assets are nonqualified financial property, and it is not a listed "sin business".⁵ Most real estate and data center funds invest through a QOZB.

4. Is the program permanent?

Yes. Public Law 119-21 made Opportunity Zones a permanent part of the Internal Revenue Code, with new zone maps every 10 years.⁶ Newly designated zones take effect January 1, 2027 and remain in effect through December 31, 2036. See whether Opportunity Zones are permanent.

5. How many Opportunity Zones are there?

There are 8,764 zones in effect today, of which 3,309 consist entirely of rural areas.⁷ For the map that takes effect January 1, 2027, Treasury's list identified 25,332 eligible tracts (8,334 wholly rural); governors may designate at most 25% of eligible tracts, or 25 tracts if greater.⁸ As of October 20, 2026, no consolidated national list of the new zones has been published.

Capital gains from a sale to an unrelated person qualify, and you generally must invest the gain in a QOF within 180 days of the date the gain would otherwise be recognized.⁹

6. Which gains can be deferred?

Gains treated as capital gain for federal income tax purposes, short-term or long-term, from selling stock, real estate, a business, crypto, collectibles or other property to an unrelated party. Gross §1231 gains from business property qualify too, but depreciation recapture taxed as ordinary income does not.¹⁰ Detail: which gains qualify.

7. Do I have to invest the whole sale price?

No. Only the gain needs to be invested to defer it. If you sell stock for $1.5 million with a $500,000 basis, investing $1 million defers the full $1 million gain; your original basis can stay in your pocket. You may also invest part of the gain and pay tax on the rest.

8. How long do I have to invest?

180 days, starting on the day the gain would be recognized, which for a simple sale is the sale date.⁹ Owners of partnerships, S corporations and trusts get extra start-date options, and §1231 gains run from the sale date. See the 180-day rule.

9. Can I invest wages, ordinary income or cash I already have?

You can invest any cash, but only the amount that represents an eligible gain for which you make a deferral election gets the tax benefits. Any other money is treated as a separate investment with no deferral, no step-up and no 10-year exclusion.¹

10. Does the buyer of my asset have to be unrelated?

Yes. The gain must come from a sale or exchange with an unrelated person, using the related-party tests of §267(b) and §707(b)(1) with a 20% ownership threshold in place of 50%.¹

11. What if I sold in 2026?

A gain realized in 2026 and invested in a QOF on or after January 1, 2027, within its 180-day window, is treated under the rules described here: five-year deferral and a 10% or 30% step-up.¹¹ Any sale on or after July 6, 2026 has a 180-day window that reaches January 1, 2027.

There are three: deferral of the invested gain for up to five years, a 10% or 30% reduction of that gain after five years, and tax-free appreciation on investments held at least 10 years. These apply to amounts invested in QOFs after December 31, 2026.¹²

12. How long is the gain deferred?

Until the earlier of the date you sell or exchange the QOF investment (or another inclusion event occurs) or the fifth anniversary of the investment. An investment made on March 15, 2027 is included in income on March 15, 2032, and the tax is reported on the 2032 return.¹³ See the five-year deferral.

13. What is the basis step-up?

Your basis in the QOF investment starts at zero. If you hold it for five years, basis increases by 10% of the deferred gain, so only 90% is taxed. In a Qualified Rural Opportunity Fund, which holds at least 90% of its assets in zones made up entirely of rural areas, the increase is 30%, so 70% is taxed.¹⁴ See the 10% and 30% step-up.

14. What does the 10-year hold do?

If you hold the QOF investment for at least 10 years, you can elect when you sell to set its basis equal to fair market value. The appreciation on the investment is then excluded from federal income tax.¹⁵ See the 10-year hold.

15. Is there a limit on how long the exclusion lasts?

Yes. If you sell after the 30th anniversary of the investment, basis is set at fair market value on that 30th anniversary, so appreciation after year 30 is taxable.¹³ Treasury has asked for comments on how the year-30 valuation will work, so the mechanics are pending.¹⁶ See the 30-year limit.

16. How much can I save?

On $1 million of long-term gain at a 23.8% federal rate, a five-year hold in a standard QOF cuts the deferred tax from $238,000 to $214,200, and in a QROF to $166,600. The larger benefit is the 10-year exclusion: if the $1 million doubles, the $1 million of appreciation escapes roughly $238,000 of federal tax. The worked tax savings example runs the full numbers.

Any taxpayer with an eligible gain can invest, by buying an equity interest in a QOF and making the deferral election on the tax return for the year of the gain.¹⁷

17. Who can invest?

Individuals, partnerships, S corporations, C corporations, trusts and estates. The tax law sets no wealth test. Most QOFs are private offerings, though, and securities law usually limits those to accredited investors. See who can invest.

18. Is there a minimum investment?

The tax law has none. Funds set their own minimums, and an investor can spread one gain across several QOFs or invest only part of it.

19. Does the investment have to be equity?

Yes. The investor must acquire an equity interest in the QOF, such as stock or a partnership interest. A loan to a QOF is not a qualifying investment. The QOF and QOZB themselves can borrow.⁵ See why the investment must be equity.

20. How do I claim the deferral?

Report the sale and the deferral on Form 8949 with your return for the year of the gain, listing the QOF's EIN and investment date, then file Form 8997 every year you hold the investment.^17,18

21. Can I set up my own QOF?

Yes. A partnership or corporation self-certifies by filing Form 8996.⁴ Doing it yourself means owning the compliance: the 90% asset test, the QOZB tests, and the annual reporting described below. See how to set up a QOF.

The fund must stay at least 90% invested in qualifying property, its business must pass the QOZB tests, and both face new annual information reporting with daily penalties.^5,19

22. What is the working capital safe harbor?

A QOZB may hold cash for up to 31 months, extendable to 62 months with multiple plans, if it has a written plan and schedule to spend it on zone property and spends it substantially as planned.²⁰ See the working capital safe harbor.

23. What reporting is required, and what are the penalties?

Funds file Form 8996 every year and investors file Form 8997. New §6039K and §6039L returns carry a penalty of $500 per day, capped at $10,000 per return or $50,000 for funds with over $10 million of gross assets. The implementing regulations were proposed on September 11, 2026 and are not final.¹⁹ See reporting requirements.

Selling early, taking certain distributions or gifting the interest can trigger the deferred gain, and state tax treatment varies.²¹

24. What triggers the deferred gain early?

An inclusion event: selling or exchanging the QOF interest, distributions in excess of basis (including some debt-financed distributions), or a gift other than to a grantor trust. Death is not an inclusion event; the heir takes over the deferred gain and the holding period.²¹ See inclusion events.

25. Do state taxes follow the federal rules?

Not always. California, for example, does not conform to federal Opportunity Zone deferral or exclusion.²² Check your state before investing. See state tax treatment.

26. What if the investment loses value?

The amount included at year 5 is limited to the investment's fair market value, so a decline reduces the tax due on the deferred gain.²³ The investment itself can still lose money, which is why sponsor and project diligence matter. See Opportunity Zone investment risks.

Yes, if the data center is owned and actively operated by a QOZB in a designated zone and the project meets the asset, income and improvement tests.

27. Why are data centers a fit, and what is the main trap?

Data centers are capital-heavy, long-lived projects that can sit on large rural sites with power and transmission, which suits both the 10-year hold and the 30% rural step-up. The main trap is the lease: merely entering into a triple-net lease is not the active conduct of a trade or business under the regulations, so a single-tenant powered shell leased to one hyperscaler needs careful structuring.²⁴ OZ Data Centers sponsors funds that own and operate data centers through QOZBs. See data centers in Opportunity Zones.