OZ 2.0
OZ 2.0: what changed, and what it means for sponsors
The 2025 legislation turned a temporary incentive into an ongoing program, with new zones, new investor rules and much stricter reporting. Here is what changed, sourced to the statute and IRS guidance.
Last reviewed October 21, 2026. Rules continue to develop; see “Still pending” below.
The short answer
Public Law 119-21, signed July 4, 2025, removed the Opportunity Zone program’s end date. New zones are designated every ten years, starting with zones effective January 1, 2027. For investments made after December 31, 2026, gain deferral runs for five years, basis rises 10% (30% in rural funds) and the ten-year exclusion is capped at 30 years. Funds and businesses face expanded reporting backed by per-day penalties.1
Key dates
The transition at a glance
Law signed
Public Law 119-21 rewrites the Opportunity Zone rules.1
First determination date
Governors begin nominating new zones under the new eligibility test.2
OZ 1.0 deferral ends
Deferred gain from original-program investments is recognized. Last day to invest under the original rules.5
First OZ 2.0 zones begin
New designations take effect. Investments from this date follow the OZ 2.0 rules.4
Most original zones expire
Original designations end (Puerto Rico’s end December 31, 2027).4
First OZ 2.0 round ends
Designations run for ten years, with a new determination round each decade.2
Side by side
OZ 1.0 compared with OZ 2.0
| Topic | OZ 1.0 (original program) | OZ 2.0 (investments after 2026) |
|---|---|---|
| Program term | Temporary. No deferral elections for gains from sales after 2026. | No end date. New designation rounds every ten years.1 |
| Zone designations | Designated in 2018; most expire December 31, 2028. | First round runs January 1, 2027 – December 31, 2036.4 |
| Eligible tracts | Low-income communities as defined for the New Markets Tax Credit, plus limited contiguous tracts. | Median family income ≤ 70% of the area median, or poverty ≥ 20% with income ≤ 125%. Contiguous tracts no longer eligible.2 |
| Gain deferral | Until the earlier of a sale or December 31, 2026. | Until the earlier of a sale or five years after the investment.3 |
| Basis step-up | 10% after five years, plus 5% after seven. | 10% after five years; 30% in a qualified rural opportunity fund.3 |
| Long-term exclusion | After ten years, elect fair-market-value basis on sale. | After ten years, elect fair-market-value basis; capped at 30 years from investment.3 |
| Rural incentives | None originally. The 50% rule below now applies to entirely rural original zones. | 30% step-up for rural funds; rural substantial-improvement threshold of 50% of basis instead of 100%.6 |
| Reporting | Self-certification and annual testing on Form 8996; investor Form 8997. | Expanded fund returns, business-level statements to funds, and new per-day penalties.7 |
For sponsors
Why professional structure is no longer optional
Reporting now carries real penalties. Funds must file expanded annual returns covering asset values on each testing date and detailed information on every business they hold, including census tracts, property, residential units and employees. Businesses must furnish statements to their funds.7 Failures can cost $500 a day, up to $10,000 per return, or $50,000 for funds with more than $10 million in gross assets, with higher amounts for intentional disregard.8
The data has to exist before the return is due. Information like tract-level property and employee counts can’t be reconstructed reliably at year-end. It has to be captured as the business operates.
Transition decisions are time-sensitive. Property acquired after 2026 for use in a zone that is not redesignated generally won’t qualify, with limited exceptions, including working-capital plans adopted and partly funded by December 31, 2026.5
Rural projects have new advantages. Rural funds earn a 30% basis step-up, and property in entirely rural zones needs improvements equal to only 50% of its basis, a rule that already applies to the 3,309 entirely rural original zones.6
Continuity
What hasn’t changed
The core tests that funds and businesses must pass carry over from the original program:
- The fund-level 90% asset test, measured semiannually.
- The business-level tests: 70% tangible property, 50% gross income from active conduct, the 40% intangibles test and the 5% nonqualified financial property limit.
- The working-capital safe harbor.
- The substantial-improvement requirement (100% of basis within 30 months), except for the new 50% rural threshold.
- The 180-day window to invest eligible gains.
Still developing
Still pending
- The official list of zones designated for 2027, which the IRS has said it will publish before January 1, 2027.4
- Final reporting regulations and a revised Form 8996. Proposed regulations were published September 11, 2026, with a public hearing scheduled for November 5, 2026.9
- Regulations on the new investor rules, including the 30-year limit and rural fund qualification.
- Treasury’s response to its request for comments on working capital, operating businesses, the 30-year rule and other topics (comments due November 23, 2026).10
We review this page as guidance is issued. The date at the top shows the last review.
Check whether an address is in an original zone or eligible for OZ 2.0
Sources
- Pub. L. 119-21, § 70421 (July 4, 2025), as reflected in 26 U.S.C. §§ 1400Z-1, 1400Z-2
- 26 U.S.C. § 1400Z-1 (designation)
- 26 U.S.C. § 1400Z-2 (special rules for capital gains invested)
- Rev. Proc. 2026-14 (nomination procedures; eligible tracts)
- IRS Notice 2026-40 (transition guidance)
- IRS Notice 2025-50 (rural substantial improvement)
- 26 U.S.C. § 6039K (QOF information returns)
- 26 U.S.C. § 6726 (reporting penalties)
- Proposed regulations REG-116506-25, 91 FR 57968 (Sept. 11, 2026)
- IRS Notice 2026-55 (request for comments)
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