Does Any OZ 2.0 Investor Get the Ten-Year Benefit?

OZ 2.0 funds start taking money January 1, 2027. The main benefit is tax-free appreciation: hold the investment ten years, and § 1400Z-2(c) lets you step its basis up to fair market value.

The problem is simple math. The OZ 2.0 zones run January 1, 2027 through December 31, 2036. Notice 2026-40 § 3.01(2); Rev. Proc. 2026-14 § 5.03.¹ The earliest any investor can reach ten years is January 2037. As a result, there is no way that any investor can actually meet the ten-year test under the current math (at least by my understanding and reading of the applicable law).

So does anyone get the ten-year benefit? Only if the fund stays a qualified opportunity fund (QOF), and its operating business stays a qualified opportunity zone business (QOZB), after the zone expires. Sponsors are pricing 2027 deals now on the assumption that they will.

The short answer

We do not know. Nothing in the statute, the regulations, or IRS guidance answers it. Until guidance issues, the issue has to be addressed in the fund’s offering documents.

Why we do not know

Expiration breaks the qualification tests

A fund stays a QOF only if its money stays invested in the zone. Three tests check that:

• Substantial use. The property must be used in the zone. § 1400Z-2(d)(2)(D)(i)(III).
• Gross income. The QOZB must earn at least half its gross income, and use a substantial portion of its intangibles, in the zone. § 1400Z-2(d)(3)(A)(ii) (incorporating § 1397C(b)(2), (4)).
• 90-percent asset test. The fund must hold 90 percent of its assets in zone property, including its QOZB interest. § 1400Z-2(d)(1).

On January 1, 2037, the tract stops being a qualified opportunity zone. As a result, all three of those tests fail.²

The Notice 2026-40 safe harbors apply only to OZ 1.0

Notice 2026-40 solves this exact problem, but only for OZ 1.0. It lets an expired OZ 1.0 zone count as a zone for the use and income tests through 2047. It does not reach OZ 2.0. Notice 2026-40 §§ 2.03(1), 5.02(2), (3). It is the likely model for the OZ 2.0 fix.

Many 2027 tracts will also have been OZ 1.0 tracts, which raises the obvious question: in an overlap tract, does the old designation carry the safe harbors forward? It does not. Property acquired after December 31, 2026 cannot be qualified opportunity zone business property unless it is acquired for use in a zone designated after July 4, 2025, because a previously designated zone has no “applicable start date.” Notice 2026-40 § 5.01(1). In an overlap tract, post-2026 property qualifies only by virtue of the OZ 2.0 designation. That designation expires in 2036.

The statute alone does not save the election

Read alone, § 1400Z-2(c) asks for only two things: a ten-year hold and an election. It says nothing about the zone still being designated. But Treasury reads the statute to require that the investment meet “the other requirements of § 1400Z-2 and the regulations thereunder through the date on which the investment is disposed of.” Notice 2026-40 § 4.01(3). That is why Treasury needed a regulation to protect the election when OZ 1.0 zones expire. And why Treasury will need to address the math issue raised in this article for OZ 2.0 zones.

The ten-year election regulation applies only to OZ 1.0

Treas. Reg. § 1.1400Z2(c)-1(c) preserves the ten-year election after an OZ 1.0 zone expires, but it has not been extended to OZ 2.0. I expect Treasury to amend it once the math problem is brought to its attention, and that amendment will likely be part of the solution.

Redesignation in OZ 3.0 cannot be counted on

If the tract is redesignated in OZ 3.0, the problem goes away.³ No sponsor raising money in 2027 can count on that.

Drafting around it

Since this is a risk that is unknown, fund counsel should disclose the risk in the offering documents.

• PPM. Add a stand-alone risk factor (sample below). Do not bury it in a “change in tax law” risk factor. This risk exists under current law.
• Tax disclosure and any tax opinion. Do not promise the ten-year benefit.
• Operating agreement. Give the manager control of exit timing and the power to amend for new guidance without a member vote. Do not promise the ten-year election.
• Subscription agreement. The investor acknowledges the risk and relies on its own tax advisors.

Sample PPM risk factor

Expiration of the Opportunity Zone Designation Before the Ten-Year Holding Period. The Project’s census tract is a qualified opportunity zone from January 1, 2027 through December 31, 2036. No Investor will have held its Interest for ten years before the designation expires, so the ten-year basis election under Code § 1400Z-2(c) may not be available and, if at all, only after expiration. Put plainly, you may not qualify for the benefits of holding your investment for ten years because of how the law is currently drafted.

No current law or guidance provides that a tract designated after July 4, 2025 continues to be treated as a qualified opportunity zone after its designation expires. As a result, (i) the Fund may fail the 90-percent asset test and owe penalties under Code § 1400Z-2(f) after December 31, 2036, and (ii) Investors may be unable to make the ten-year election, in which case gain on their Interests will be taxable. Each Investor should consult its own tax advisors.

A request for guidance

Every OZ 2.0 fund has this problem. Two changes would fix it:

1. Extend the Notice 2026-40 § 5.02 safe harbors to OZ 2.0.
2. Amend Treas. Reg. § 1.1400Z2(c)-1(c) to cover OZ 2.0.

Treasury is taking comments on § 1400Z-2 right now, asking generally which provisions of the § 1400Z-2 regulations should be modified or supplemented.⁴ This issue belongs there.

Comments are due November 23, 2026, at regulations.gov, docket IRS-2026-1156. If you have hit this in a 2027 offering, comment. Now, not in 2036.

Citations

Statutes

• 26 U.S.C. §§ 1397C(b)(2), (b)(4), 1400Z-1(c)(2)(B)–(C), (e), 1400Z-2(c), (d)(1), (d)(2)(D)(i)(III), (d)(3)(A)(ii), (d)(3)(B), (f) (decennial designations; designation period; qualification tests; ten-year election; QOF penalty).
• One Big Beautiful Bill Act, Pub. L. No. 119-21, § 70421, 139 Stat. 72, 223–34 (July 4, 2025) (§ 70421(a) adding the decennial determination date; § 70421(b) setting the OZ 2.0 designation period; § 70421(c)(3) amending the ten-year election; § 70421(c)(5)(A) applying the amendments to amounts invested after December 31, 2026).

Administrative Authority

• Treas. Reg. § 1.1400Z2(c)-1(c) (preserving the ten-year election after an OZ 1.0 designation expires, for dispositions through December 31, 2047).
• Treas. Reg. § 1.1400Z2(d)-1(b)(2)(i)(C), (c)(2)(i)(C), (c)(3)(i)(C) (QOZB status measured over 90 percent of the QOF’s cumulative holding period).
• Notice 2026-40, 2026-28 I.R.B. 33 (July 6, 2026) (§ 2.03(1) defining “previously designated QOZ”; § 4.01(3) requirements must be met through disposition; § 3.01 designation period and 25-percent limitation per designation period; § 5.01(1) property acquired after December 31, 2026 cannot be QOZBP unless acquired for use in a zone designated after July 4, 2025; § 5.02 post-expiration safe harbors for OZ 1.0 zones through December 31, 2047).
• Rev. Proc. 2026-14, 2026-20 I.R.B. 910 (§§ 2.02, 5.03) (independently stating that the designation period for 2027 zones begins January 1, 2027 and ends December 31, 2036).
• Notice 2026-55, 2026-42 I.R.B. 497 (October 13, 2026) (requesting comments on § 1400Z-2 after the OBBBA amendments; § 3.01(1) inviting comments on provisions of the § 1400Z-2 regulations that should be retained, modified, or supplemented; § 3.01(4) on the ten-year election and the 30-year rule; comments due November 23, 2026; docket IRS-2026-1156).

Footnotes

1. Those dates assume Treasury certifies the tracts this year. Nominations close October 28 and certification follows. If certification slips into 2027, every date moves a year and the gap is the same. ↩

2. Strictly, the use and income tests fail on January 1, 2037, and the 90-percent asset test fails as a result. The gross income test is the one that binds. A QOZB must earn at least half its gross income from the active conduct of a trade or business in the zone, § 1400Z-2(d)(3)(A)(ii) (incorporating § 1397C(b)(2)), and nothing in the statute or the regulations cushions it. Once there is no zone, it fails and stays failed. Two cushions do exist, and neither reaches it. First, property that stops qualifying still counts as qualified opportunity zone business property for up to five years, into 2042. § 1400Z-2(d)(3)(B). But that rule deems property to keep its status, which answers the substantially-all-tangible-property test in § 1400Z-2(d)(3)(A)(i); the gross income test does not ask whether property qualifies; it asks where the income is earned. Second, a fund may choose to count its QOZB interest if the entity was a QOZB for at least 90 percent of the fund’s cumulative holding period, measured from the date self-certification first took effect. Treas. Reg. § 1.1400Z2(d)-1(b)(2)(i)(C)(1), (c)(2)(i)(C), (c)(3)(i)(C). That one is elective, not automatic, and it is short: a QOZB that qualified from 2027 through 2036 buys about a year. No guidance addresses how either rule works after a zone expires, and applying the five-year rule to property that stopped qualifying only because its zone lapsed is a literal reading no one has tested. ↩

3. OBBBA provides for new designations every ten years. Nominations for OZ 3.0 open July 1, 2036, for zones effective January 1, 2037. § 1400Z-1(c)(2)(B)–(C), (e)(2); Notice 2026-40 § 3.01(1). ↩

4. Notice 2026-55, 2026-42 I.R.B. 497 (October 13, 2026), § 3.01(1). ↩