Opportunity Zones for landowners

You can sell, contribute or lease, and each gives a different mix of cash, tax deferral and upside. The Opportunity Zone benefits attach to investors who put capital gains into a Qualified Opportunity Fund (QOF), not to land itself¹. So the question for a landowner is how to turn the land into a qualifying investment, or into a reliable income stream, without breaking the buyer's compliance.

You sell, recognize a capital gain or §1231 gain, and invest an amount up to that gain in any QOF within 180 days of the sale. Land held for investment produces capital gain; land used in a trade or business, such as farmland, produces §1231 gain, and the gross §1231 gain qualifies with the 180-day period starting on the sale date¹⁰. Land is not depreciable, so a land sale rarely carries depreciation recapture, though improvements on it can⁸.

At a 23.8% federal rate, tax on that $2.5 million gain would be $595,000 if paid now. Invested in a standard QOF on or after January 1, 2027 and held five years, 90% of it ($2.25 million) is taxed in year five, for $535,500. In a Qualified Rural Opportunity Fund, 70% is taxed, for $416,500¹³. Growth on the fund interest after 10 years can be excluded entirely¹.

Seller financing changes the timing. Gain on an installment sale is reported as payments arrive, and the final regulations let each 180-day period start on the date a payment is received or, by election, on the last day of the tax year¹⁰. Depreciation recapture, if any, is taxed in the year of sale regardless⁹. See the 180-day rule and which gains qualify.

You can, but contributed land usually delivers less than a sale. Under the final regulations, when property other than cash goes into a QOF in a carryover-basis transaction, the qualifying investment is the lesser of your adjusted basis in the property or the value of the equity received, and it qualifies only to the extent you have eligible gain (from some other sale) to elect to defer; any excess is a non-qualifying investment with no Opportunity Zone benefits⁴. Land with a low basis and high value is mostly built-in gain, so most of it falls in the non-qualifying portion.

There is a second problem on the fund side. Qualified Opportunity Zone business property must be acquired by purchase³. Land the fund receives as a contribution, with your carryover basis, is generally not purchased property, so it may not count toward the fund's 90% asset test or a QOZB's 70% tangible property test. Practitioner commentary on the property-contribution rules flags these limits⁵. Treat a contribution as a specialist transaction and get tax counsel involved before any letter of intent.

Because land is excluded from the test. The IRS said in Rev. Rul. 2018-29 that the original use requirement does not apply to land and that land under a purchased building need not be separately improved; only the building's basis must be doubled within 30 months². In a zone made up entirely of rural area, the building hurdle is 50% rather than 100%¹³.

For a landowner this cuts both ways. The buyer does not have to spend more because your land is valuable, which helps you sell. But land bought with no expectation of more than insubstantial improvement within 30 months cannot rely on the land exception, under an anti-abuse rule in the regulations⁶. Buyers will want a real development plan, so expect options with diligence periods rather than quick closings. See the substantial improvement test.

Yes. A QOZB can count leased land as qualifying property if the lease is at market rate, and original use does not apply to leased property⁷. Many data center operators prefer ground leases because land is not depreciable and keeping fund equity out of it improves returns. Nautilus Data Technologies, for example, used a 99-year lease at a former mill site in Millinocket, Maine¹².

• Unrelated landlord: market-rate terms are the main requirement.
• Related landlord (20% or more common ownership): no prepayment of rent for more than 12 months, and extra conditions apply to previously used property⁷.
• Rent is ordinary income to you; a lease creates no capital gain to defer.
• The active-business concern about triple-net leases applies to the QOZB's own leasing of the building, not to you as ground lessor.

Read leased property rules and data center lease structures before negotiating.

Power, scale and a clean approval path matter more than location inside the zone alone. One hyperscaler request sought at least 200 acres with 400 MW available by mid-2027¹⁴. Buyers will test the tract's designation for 2027 to 2036, distance to high-voltage transmission, water, fiber, zoning and flood status. Newly designated zones take effect January 1, 2027, and property bought after 2026 in a zone that is not redesignated generally will not qualify¹¹.

Our guide to buying land for an Opportunity Zone data center shows the buyer's checklist, which is a good preview of what diligence will cover.

• Is my tract on the state's nomination list, and has Treasury certified it?
• Is the zone wholly rural, so a buyer can use the 50% threshold or a rural fund?
• Will I take equity in the buyer? If so, how do we stay below 20%?
• Is the deal an option? What are the extension fees and diligence deadlines?
• If seller-financed, how will I schedule QOF investments for each payment?
• Does my state conform to federal Opportunity Zone treatment?

The tax result depends on how long you have held the land and how it was used, so confirm with your tax adviser before signing. See also Opportunity Zones for real estate investors selling property and the Opportunity Zone rules summary from RSM¹⁵.