Opportunity Zone myths and misconceptions

Only eligible capital gains, invested within 180 days, earn Opportunity Zone benefits, and you only need to invest the gain itself.^1,2

Myth 1: You have to reinvest the entire sale price

Unlike a 1031 exchange, the Opportunity Zone rules look only at the gain. Sell a building for $5 million with a $3 million adjusted basis, and investing the $2 million gain in a Qualified Opportunity Fund (QOF) defers all of it. The $3 million of basis is yours to keep. The Opportunity Zone vs. 1031 exchange guide compares the two side by side.

Myth 2: Any money you invest gets the tax break

Only the amount of an eligible gain for which you elect deferral counts. If you invest $1 million but only $600,000 is deferred gain, the other $400,000 is a separate investment that gets no deferral, no step-up and no 10-year exclusion.¹ Wages, business profits and ordinary income cannot be deferred.

Myth 3: Only long-term gains qualify

Short-term capital gains qualify too, and they keep their short-term character when the deferred gain is later taxed. Gross §1231 gains from business property qualify; the part of a gain recaptured as ordinary income under §1245 or §1250 does not.³ See Section 1231 gains and Opportunity Zones.

Myth 4: You can sell to a related party and reinvest

The gain must come from a sale or exchange with an unrelated person. The related-party test borrows §267(b) and §707(b)(1) but uses a 20% ownership threshold instead of 50%.¹

The benefits are real but bounded: deferral is temporary, the step-up is partial, and the exclusion covers only appreciation for up to 30 years.⁴

Myth 5: The deferred tax is forgiven

It is not. For amounts invested in a QOF after December 31, 2026, the deferred gain is included in income on the earlier of the date you dispose of the investment or the fifth anniversary of the investment date.⁵ Plan for that tax bill, because the fund may not distribute cash to pay it. See the five-year deferral.

Myth 6: Everyone's deferred gain comes due on the same date

There is no single national deadline. Each investment has its own five-year clock. A March 2027 investment is taxed in March 2032; a November 2028 investment in November 2033.⁴

Myth 7: The step-up eliminates most of the deferred gain

Holding five years increases basis by 10% of the deferred gain, so 90% is still taxed. A Qualified Rural Opportunity Fund (QROF) gets a 30% step-up, leaving 70% taxed.⁶ There is no additional step-up for longer holds. See the 10% and 30% basis step-up.

Myth 8: The 10-year exclusion wipes out the original gain too

The 10-year election sets the QOF investment's basis to fair market value, which excludes the appreciation on the investment. The original deferred gain has already been taxed at year 5.⁷ See the 10-year hold.

Myth 9: The exclusion lasts forever

If you sell after the 30th anniversary of the investment, basis is fixed at fair market value on that anniversary, so later appreciation is taxable.⁶ How that year-30 value will be determined is the subject of pending Treasury guidance.⁸ See the 30-year limit.

Being located in a zone is necessary but not sufficient: property must be newly placed in service or substantially improved, bought from an unrelated party, and used in an active business.⁹

Myth 10: Buying any building in a zone qualifies

A used building must be substantially improved: additions to basis over any 30-month period must exceed the building's adjusted basis at the start of that period (land excluded). In zones made up entirely of rural areas the threshold is 50% of basis.¹⁰ A building vacant for at least three years can qualify as original use instead.¹¹ See the substantial improvement test.

Myth 11: Opportunity Zones are only for real estate

A Qualified Opportunity Zone Business (QOZB) can be an operating company, from a manufacturer to a data center operator. It must meet the 70% tangible property, 50% gross income, 40% intangibles and 5% financial property tests, and it cannot be a golf course, country club, massage parlor, hot tub or suntan facility, racetrack or other gambling facility, or liquor store.⁹

Myth 12: Leasing a building to a tenant is always an active business

Owning and leasing real property can be an active trade or business, but merely entering into a triple-net lease is not. The regulations' example of a landlord leasing an entire building to one tenant on a triple-net basis fails, even with an on-site office.¹² This is the central structuring question for powered shell data centers leased to a single hyperscaler.¹³ See powered shell and triple-net data centers.

The tax law has no wealth test or minimum, but it does require an equity investment and annual reporting.¹⁴

Myth 13: The law limits Opportunity Zones to wealthy investors

Any taxpayer with an eligible gain can defer it, whether an individual, partnership, corporation, trust or estate. Securities law, not tax law, is why most private QOFs accept only accredited investors. See who can invest.

Myth 14: You can lend money to a fund and get the benefits

The qualifying investment must be equity in the QOF, such as a partnership interest or stock. Debt instruments do not qualify, although the fund and its QOZB can borrow to build.⁹

Opportunity Zones are a permanent part of the tax code, with new maps every 10 years and stricter reporting.¹⁵

Myth 15: The program is ending

Public Law 119-21 made the program permanent. New zones take effect January 1, 2027 and run through December 31, 2036, after which a new decennial map applies.¹⁵ Treasury's eligibility list for the new map identified 25,332 tracts, 8,334 of them wholly rural.¹⁶ See the new zone maps.

Myth 16: State taxes follow the federal rules automatically

They do not. California does not conform to federal Opportunity Zone deferral or exclusion, and several other states conform only partly.¹⁷ Run the state math before relying on a combined rate. See state tax treatment.

A related misconception: failing a test instantly kills the benefits

If a QOF falls below the 90% asset test, the statute imposes a monthly penalty on the fund equal to the shortfall times the federal underpayment rate, unless the failure is due to reasonable cause. It does not by itself trigger investors' deferred gains.¹ Repeated failure and decertification are another matter. The new annual returns also carry a $500-per-day penalty, capped at $10,000 per return or $50,000 for funds with over $10 million in gross assets, under regulations that are still proposed.¹⁸

Data centers can work well in Opportunity Zones, but the structure has to fit the rules for active business, leased property and equipment.¹³

• "Servers installed by a tenant count toward the fund." Equipment a tenant owns is the tenant's property, not the QOZB's, so it does not help the QOZB's 70% tangible property test. Only property the QOZB owns or leases counts.
• "A 10-year hold means 10 years of IT equipment." Hyperscalers depreciate servers over five to six years, so a fund that owns IT equipment should expect refresh cycles inside the hold. Most of the long-lived value sits in land, shell, power and cooling.
• "Long construction is a problem for the cash rules." The working capital safe harbor allows 31 months per plan and up to 62 months with multiple plans, with tolling for government delay on a completed application. It is a schedule to manage, not a bar.²¹
• "Rural sites always get the 30% step-up." Only a QROF, holding at least 90% of its assets in zones made up entirely of rural areas, gets 30%. A rural-feeling site in a mixed zone does not.²²

See data centers in Opportunity Zones for the full treatment.