Opportunity Zones for family offices

They suit family offices because the largest benefit, tax-free appreciation after 10 years, goes to investors who can wait, and family capital can wait longer than most. The program is permanent under IRC §1400Z-2 as amended by Public Law 119-21¹. For gains invested on or after January 1, 2027, the deferred gain is taxed on the earlier of a sale or the fifth anniversary of the investment, with a 10% step-up (30% for a Qualified Rural Opportunity Fund) at five years². Appreciation is excludable for holds of 10 to 30 years¹².

How the 30-year basis is determined without a sale is one of the open questions in Notice 2026-55, so plan for that detail to change^10,11. See the 30-year limit.

The entity that recognizes the gain makes the election, unless it passes that choice to its owners. Under the final regulations, a partnership, S corporation, estate or non-grantor trust can elect to defer at the entity level. If it does not, each owner can elect, with a 180-day period starting at the entity's year-end, the date of the entity's sale, or the unextended due date of the entity's return³.

Choosing the investing entity also sets who pays the year-five tax and who can later make the 10-year election. Match it to the family's estate plan before the first wire. Details: partnership and K-1 gains.

Form a captive fund when the family has its own deal flow and compliance staff; invest with a sponsor when it wants diversification or a specialist asset such as data centers. Any partnership or corporation can become a QOF by self-certifying on Form 8996 and must report its 90% asset test each year⁷. The IRS describes how to certify and maintain a fund⁶.

The compliance load is real. A QOF that fails the 90% test pays a monthly penalty, and new §6726 information-reporting penalties run $500 per day, capped at $10,000 per return or $50,000 for funds with gross assets above $10 million⁸. Proposed regulations published September 11, 2026 would require tract-level reporting and a formal decertification process; they are not final⁹. See how to set up a QOF and single-asset vs. multi-asset funds.

Gifts usually trigger the deferred gain, death does not, and grantor trusts are the main planning exception. Under the final regulations, a gift of a QOF interest is an inclusion event unless the recipient is a grantor trust of the donor⁴. At death, the deferred gain passes to the heir as income in respect of a decedent under §691, and the heir keeps the decedent's holding period toward the 10-year benefit⁵.

These rules are technical and depend on trust terms, so have estate counsel review any transfer before it happens. For the full list of triggers, see inclusion events.

Plan for the year-five tax from outside cash, and decide early whether the exit will be a sale of fund interests or of assets. At year five, tax is due on 90% of the deferred gain in a standard fund or 70% in a rural fund, measured against the value of the investment if lower². On a $5 million gain at a 23.8% federal rate, that is $1,071,000 in a standard fund and $833,000 in a rural fund (illustrative; no state tax).

On exit, a flow-through QOF gives more flexibility. After a 10-year hold, investors in partnership or S corporation QOFs can elect to exclude gain from the fund's or a lower-tier QOZB's sale of assets, including depreciation recapture, with an exception for inventory¹³. That allows a data center fund to sell assets one at a time. Check state tax treatment too: California, for example, does not conform to federal deferral or exclusion¹⁵. See exit strategies after 10 years and state tax treatment.

• Which entity has the gain, and which entity should own the QOF interest given the estate plan?
• Do we have the staff to run a captive fund's testing and reporting, or should a sponsor do it?
• Is the fund a Qualified Rural Opportunity Fund, holding 90% of assets in wholly rural zones¹⁴?
• How is year-five tax funded? Will the fund make distributions without exceeding basis?
• What is the exit plan at year 10 and the plan if the family wants to hold past year 30?
• How will interests pass between generations without triggering inclusion?

Data center funds are one way to put long-hold capital into infrastructure with contracted demand; tracked QOFs had raised $43.61 billion through Q1 2026, mostly in real estate¹⁶. See data centers in Opportunity Zones and the fund due diligence checklist. If you would like to discuss a co-investment, talk to our team.