Depreciation, bonus depreciation and Opportunity Zones

Yes. A Qualified Opportunity Fund (QOF) or the Qualified Opportunity Zone Business (QOZB) it owns depreciates its property under the normal rules of §§167 and 168. Nothing in §1400Z-2 limits depreciation.⁴ Opportunity Zone status changes what happens when the investment is sold, not how assets are depreciated while they are held.

The connection is that depreciation lowers tax basis, and a lower basis normally means more taxable gain, including ordinary-income recapture, on sale. The 10-year rule removes that gain. So deductions taken during the hold are not paid back at exit if the investor qualifies for and makes the 10-year election.^5,6 That is what makes accelerated depreciation more valuable inside a QOF than in an ordinary real estate investment.

Yes, for property that qualifies under §168(k). Public Law 119-21 made 100% bonus depreciation permanent for qualified property acquired after January 19, 2025.^1,15 Qualified property includes MACRS property with a recovery period of 20 years or less, computer software and qualified improvement property. A transitional election allows 40% or 60% for certain 2025 property.^1,2

The building shell is 39-year property and does not qualify. Cost segregation, an engineering study that splits a project's cost into its tax classes, identifies the portion that does: site work and land improvements (15-year), many electrical and mechanical systems serving equipment rather than the building (5- or 7-year), and personal property.^3,8 Data centers have an unusually large share of cost in these classes because power and cooling dominate the budget. Power infrastructure is the single largest component, about 21% of a greenfield build, according to Cushman & Wakefield's 2026 cost guide.¹²

Investors in a QOF partnership can use allocated losses only to the extent of their basis, and basis in the qualifying investment starts at zero. Under §1400Z-2(b)(2)(B), an investor's initial basis in a QOF interest acquired with deferred gain is zero.⁴ A partner's share of partnership liabilities under §752 generally adds outside basis, which is what lets a leveraged project pass losses through. The regulations treat that deemed contribution as basis but not as a separate investment of eligible gain.^7,10

• Basis limit (§704(d)): losses beyond basis are suspended and carried forward.
• At-risk limit (§465): qualified nonrecourse real estate financing generally counts as at risk.
• Passive activity limits (§469): most QOF investors are passive, so losses offset passive income only.
• Excess business loss limit (§461(l)): applies to noncorporate taxpayers with large net business losses.

An all-equity QOF with no debt gives its investors almost no capacity to use losses in the early years, which is one reason commentators note that cost segregation pays off mainly when there is debt or additional non-qualifying equity in the structure.⁸ For a QOF taxed as a corporation, losses stay at the corporate level. See Opportunity Zone fund structures and debt and financing in Opportunity Zone projects.

It is excluded if the investor makes the 10-year election. An investor who has held a qualifying investment for at least 10 years can elect to treat its basis as fair market value on sale, so the gain, including recapture, is not taxed.^4,5 The final regulations, T.D. 9889, went further in two ways that matter for depreciation.¹⁰

• On a sale of a QOF partnership interest, the basis adjustment accounts for the partner's share of fund liabilities, so the relief of debt that was used to fund depreciation does not create gain.⁵
• If a QOF partnership or S corporation (or a lower-tier partnership it owns) sells assets, the investor can elect to exclude its share of the gain, other than gain from the sale of inventory in the ordinary course of business. Practitioner summaries of the final regulations describe this election as reaching §1231 gain and depreciation recapture; confirm the treatment of a specific sale with your tax adviser.^5,6

Sold before 10 years, the normal rules apply. Depreciation on §1245 property (equipment) is recaptured as ordinary income; depreciation on buildings is taxed as unrecaptured §1250 gain at up to 25%. The appreciation above original cost is capital gain. Holding for at least 10 years is the condition that makes accelerated depreciation a permanent benefit rather than a timing benefit; see the 10-year hold.

Illustrative assumptions: a QOF partnership invests $20,000,000 of deferred gain in a QOZB that builds a $50,000,000 data center with $30,000,000 of qualified nonrecourse debt. Cost segregation assigns $3,000,000 to land, $14,000,000 to the 39-year building and $33,000,000 to bonus-eligible 5-, 7- and 15-year property. Federal rates: 37% ordinary, 25% on unrecaptured §1250 gain, 20% on capital gain, each plus 3.8% net investment income tax. No state tax.

• Year one: $33,000,000 of bonus depreciation plus about $350,000 of building depreciation. Investor basis from the $30,000,000 debt share limits usable losses to $30,000,000; the rest is suspended.
• Year five: the $20,000,000 deferred gain is included less the 10% step-up: $18,000,000, or $4,284,000 of tax.
• Year 11: the QOF interest is sold for a value implying an $80,000,000 asset price. Accumulated depreciation is about $36,600,000, so adjusted basis in the assets is about $13,400,000.

The year-one deductions are worth up to 40.8% of the amount used at the investor's marginal rate, and none of that is clawed back on exit. The cost of the structure is that the deferred gain is still taxed at year five. Your own numbers will depend on debt terms, passive income and state treatment, so confirm with your tax adviser.

Equipment will be replaced during the hold, and each replacement must meet the property rules on its own. Hyperscalers depreciate servers over roughly five to six years for book purposes; Amazon shortened a subset of servers and networking equipment from six years to five effective January 1, 2025, citing the pace of AI development.¹¹ Over a 10-year hold, a QOZB that owns IT equipment will buy at least one new generation.

• Replacement equipment must be acquired by purchase from an unrelated party and be original use in the zone to count as Qualified Opportunity Zone business property for the 70% test.⁹
• New equipment acquired after January 19, 2025 is eligible for 100% bonus depreciation in the year placed in service, which supports refresh cycles.¹
• Old equipment sold or scrapped produces recapture at the QOZB level. After the 10-year mark, the asset-sale election can exclude that gain; before it, the gain is taxable.⁶
• In a lease to a hyperscaler or colocation customer, the tenant usually owns the servers, so the depreciation, and the equipment, are the tenant's, not the QOZB's.

For the property rules on equipment, see servers, equipment and the Opportunity Zone rules and the QOZB 70% tangible property test.

Not all of them. Many states decouple from bonus depreciation and require their own schedules. California, for example, does not conform to federal bonus depreciation, increased §179 expensing or the Opportunity Zone provisions.¹³ For investors, that means state losses are smaller in early years and state gain at exit is not excluded. See state tax treatment of Opportunity Zone investments.