Opportunity Zones for investors with capital gains

They apply if you have a capital gain that would be recognized for federal income tax and you can invest an equal amount in a Qualified Opportunity Fund (QOF) within 180 days. A QOF is a corporation or partnership that self-certifies on Form 8996 and holds at least 90% of its assets in Opportunity Zone property⁹. Both short-term and long-term capital gains qualify, as does gross §1231 gain from business property, but depreciation recapture taxed as ordinary income does not⁵.

Individuals, C corporations, partnerships, S corporations, trusts and estates can all invest. Many private funds are offered only to accredited investors; check each fund's offering terms. For detail, see which gains qualify and who can invest.

On a $1 million gain, the step-up alone saves about $23,800 at five years in a standard QOF and about $71,400 in a rural fund, and the 10-year exclusion can save far more if the investment grows. The statute sets the rules: deferral under §1400Z-2(a), the five-year inclusion and step-up under §1400Z-2(b), and the 10-year basis election under §1400Z-2(c)¹. For investments after December 31, 2026, the deferred gain is included on the earlier of a sale or the fifth anniversary of the investment².

Most of the value comes from the 10-year exclusion, not the deferral. That means the investment itself has to perform. A weak project with full tax benefits can lose to a strong taxable investment. Our worked tax savings example varies the assumptions.

Five dates govern the investment: the sale date, day 180, year five, year 10 and year 30. The 180-day window runs from the date your gain would be recognized, with special start dates for flow-through gains and installment sales⁵.

See the 180-day rule, the five-year deferral and the 30-year limit. The 30-year mechanics without a sale are among the questions Treasury asked about in Notice 2026-55, so that detail is pending¹⁰.

You buy an equity interest in a QOF with cash equal to the gain, then make the deferral election on your tax return. The interest must be equity, not debt¹.

1. 1.Confirm the gain amount, character and 180-day start date with your tax adviser.
2. 2.Choose a fund and complete diligence before day 150 or so, leaving time to wire.
3. 3.Wire cash for an equity interest; keep the subscription documents showing the investment date.
4. 4.Elect deferral on Form 8949 with your return for the year of the gain, listing the fund's EIN and investment date.
5. 5.File Form 8997 every year you hold the investment, reporting deferred gains held at the start and end of the year⁷.
6. 6.Reserve cash for the year-five tax and check state treatment.

Form mechanics are covered in Form 8996 and Form 8997, explained. Novogradac's guide to the forms describes how the deferral appears as a negative adjustment on Form 8949⁸.

The common mistakes are missing the 180-day window, triggering an early inclusion event, ignoring state tax, and underestimating the year-five tax and the illiquidity.

• Missed deadline: a wire on day 181 is not a qualifying investment.
• Inclusion events: selling or gifting the interest (other than to a grantor trust) or taking distributions above basis can trigger the deferred gain early. Death is not an inclusion event¹¹. See inclusion events.
• State tax: California does not conform to federal deferral or exclusion, so California residents still owe state tax on the gain¹⁴. See state tax treatment.
• Year-five cash: tax is owed on 90% (or 70%) of the deferred gain even though the fund interest may not be sellable.
• Fund compliance: funds now face reporting penalties of $500 per day, capped at $10,000 per return or $50,000 for large funds, under §6726⁶.
• Investment risk: the tax benefit does not rescue a bad project. Read the risks of Opportunity Zone investing.

Ask about the asset, the compliance plan, the exit and the people, in that order.

Our fund due diligence checklist and how to choose a sponsor go further.

Data centers combine long-lived real assets with contracted demand, which suits a 10-year hold, but they also bring power, lease-structure and equipment-cycle risks that investors should probe. Tracked QOFs had raised $43.61 billion of equity through the first quarter of 2026, according to Novogradac¹³, and GAO found that most Opportunity Zone investment to date has gone to real estate in urban areas¹². The rural incentives aim to shift that mix, and rural sites near transmission are common for large data centers. Rules on rural funds are summarized by the IRS⁴ and in our guide to the Qualified Rural Opportunity Fund.

OZ Data Centers sponsors funds of this kind. For a full treatment of the asset class, see data centers in Opportunity Zones. Note that a bill introduced in September 2026 would exclude data centers from Opportunity Zone benefits; it was not law as of this review¹⁵.