How the five-year Opportunity Zone deferral works

The deferred gain is included in income in the taxable year that includes the earlier of two dates: the date the Qualified Opportunity Fund (QOF) investment is sold or exchanged (or another inclusion event occurs), or the date five years after the investment was made.^1,2 This rolling rule applies to amounts invested in QOFs after December 31, 2026.³

There is no national deadline. Two investors who invest a month apart have inclusion dates a month apart. The clock runs from the date of the investment, not the date of the sale that produced the gain, so a gain realized in October 2027 and invested in January 2028 is included in January 2033.⁴

The amount included is the excess of the lesser of the deferred gain or the fair market value of the QOF investment, over your basis in the investment.^1,5 Your basis starts at zero and, after five years, increases by 10% of the deferred gain, or by 30% for a Qualified Rural Opportunity Fund (QROF).⁶

A QROF is a QOF that holds at least 90% of its assets in Opportunity Zone property in zones made up entirely of rural areas.⁷ For a standard QOF held five years, 90% of the deferred gain is taxed; for a QROF, 70%. If the investment has lost value, the fair market value cap reduces the inclusion further. See the 10% and 30% basis step-up.

Assumptions for every example on this page: the deferred gain is long-term, taxed at the 20% top federal rate plus the 3.8% net investment income tax (23.8%), with no state tax and no change in rates. Year-3 sale tax: $1,200,000 of total gain times 23.8% equals $285,600, assuming the appreciation is long-term.

An investor with a $1 million long-term gain who invests it in a standard QOF and holds five years owes $214,200 at year 5 instead of $238,000 at the time of sale, and pays it five years later.

1. 1.Gain realized January 10, 2027: $1,000,000 of long-term capital gain. Tax if not deferred: $1,000,000 times 23.8% equals $238,000, due with the 2027 return.
2. 2.Investment March 15, 2027: $1,000,000 into a standard QOF. Initial basis: $0.
3. 3.Step-up March 15, 2032: basis increases by 10% of $1,000,000, to $100,000.
4. 4.Inclusion March 15, 2032: the lesser of $1,000,000 deferred gain or the investment's value (assume $1,400,000) is $1,000,000; minus $100,000 basis equals $900,000 included.
5. 5.Tax: $900,000 times 23.8% equals $214,200, reported on the 2032 return.
6. 6.After inclusion: basis increases by the $900,000 included, to $1,000,000.

The deferral is also worth money because tax paid later costs less in present-value terms. At a 5% discount rate, $214,200 paid five years from now has a present value of about $167,800, and the QROF's $166,600 about $130,500, against $238,000 paid now. The full tax savings example adds the 10-year exclusion.

You report the included gain on the return for the taxable year that contains the five-year date and pay it through estimated taxes and the return, like any other gain.⁸

• Character carries over. A deferred long-term gain is included as long-term gain, and a short-term gain as short-term. Rates in effect for the inclusion year apply, so a change in capital gains rates would change the bill.⁹
• Estimated taxes. For a calendar-year individual with a March 2032 inclusion, the gain falls in 2032 and estimated payments during 2032 may be required to avoid an underpayment penalty.
• Reporting. Form 8997 tracks the deferred gain each year and reports the inclusion; the gain itself is reported on Form 8949 and Schedule D for the inclusion year.⁸
• State tax. State treatment can differ; California, for example, does not conform to federal deferral.¹⁰ See state tax treatment.

The tax is due whether or not the fund distributes cash. Most investors plan to pay it from other funds. Some funds distribute cash around year 5 from operations or a refinancing, but distributions must be structured carefully because a distribution in excess of basis can itself be an inclusion event.

An inclusion event before the fifth anniversary triggers the deferred gain early, and because the five-year holding period was not met, there is no 10% or 30% step-up.^11,5

Partial dispositions trigger a proportional part of the deferred gain. Treasury asked for comments on inclusion-event rules in Notice 2026-55 (comments due November 23, 2026), so further guidance may refine these rules.¹² See Opportunity Zone inclusion events.

Once the deferred gain is included, your basis in the QOF investment increases by the amount included, so a sale between years 5 and 10 taxes only the appreciation.¹

Continuing the example: after the $100,000 step-up and the $900,000 inclusion, basis is $1,000,000. Selling in year 7 for $1,400,000 produces $400,000 of gain. Holding at least 10 years lets you elect a fair market value basis instead, excluding that appreciation entirely, up to the investment's value on its 30th anniversary.¹³ See the 10-year hold and the 30-year limit.

For a ground-up data center, year 5 often lands during lease-up or early operations, before the project's value is fully realized, so investors should plan to fund the year-5 tax from outside cash.¹⁴

Power interconnection, permitting and construction can take several years, and the QOZB can hold cash for up to 31 months per plan (62 months maximum) under the working capital safe harbor while it builds.¹⁵ A stabilized, leased facility may support a refinancing that funds distributions, but the timing and the distribution's tax treatment are deal-specific. Ask the sponsor how it expects the year-5 date to fall against the build schedule. See the data center development timeline.

The five-year rule itself is in the statute, but several implementing details await regulations.^12,3

• Notice 2026-40 is interim transition guidance and announced proposed regulations that have not been issued.
• Notice 2026-55 requests comments on inclusion events, interim gains and other §1400Z-2 issues, due November 23, 2026.
• Detailed rules on how a fund establishes and keeps QOF versus QROF status over the five years have not been issued; review the fund documents.