Opportunity Zone 2.0: Treasury Notice 2026-40 and What It Means for Developers

On June 18, 2026, the IRS released Notice 2026-40, its first piece of transitional guidance on the rebuilt Opportunity Zone program. The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, made the OZ incentive permanent and changed how it works going forward. It left a set of timing questions unanswered, and those questions matter to anyone raising and deploying capital across the seam between the old zones and the new round that goes live January 1, 2027.

The Notice is a preview of proposed regulations the IRS intends to issue. It is not final law. It answers four questions for fund sponsors and their counsel, and for developers the answers are, on balance, favorable. This piece is written from the developer’s side: the four clarifications, and what they mean for a sponsor raising the money and living by the rules. Several points below are framed with the help of Andrew Gradman’s contemporaneous memorandum on the Notice.

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Part I: The clarifications

1. The 25% cap and the new designation round

Section 1400Z-1 lets each state designate as Opportunity Zones up to 25% of its low-income community census tracts. The question was arithmetic. The old zones do not expire until the end of 2028, so would they count against the 25% a governor can nominate for the new round starting in 2027?

The Notice answers no. The 25% limit applies per ten-year designation round, not to the number of zones that coexist at one moment, so previously designated zones do not count against the new nominations. The designation period for tracts certified in 2026 runs January 1, 2027 through December 31, 2036. Notice 2026-40 § 3.01.

2. When a 2027 reinvestment is allowed

A common 2027 scenario is an investor with gain tied to a pre-2027 QOF, either from an inclusion event or from the deemed inclusion that reaches everyone still holding a pre-2027 investment on December 31, 2026, who wants to roll it into a new QOF. Whether that works turns on whether the investor still holds the original qualifying investment when it makes the new one.

• Still holding it: no reinvestment. Under § 1400Z-2(a)(2), a taxpayer cannot make a new deferral election on gain for which a prior deferral election remains in effect, and the deemed December 31, 2026 inclusion does not end that election. Notice 2026-40 § 4.01(2).
• No longer holding it, the typical case where the gain came from selling the QOF interest: reinvestment is available. Notice 2026-40 § 4.03.

3. New purchases of tangible property in old zones: the acquisition-date requirement, with two exceptions

OBBBA introduced two defined terms, applicable date and applicable start date, that feed the definitions of qualified opportunity zone business property (QOZBP), QOZ stock, and QOZ partnership interests, effective for property acquired after December 31, 2026. For the new zones, the applicable start date is January 1, 2027. For the old zones the term does not apply at all, because § 1400Z-1(e)(2) defines applicable start date only for zones designated after OBBBA’s enactment. OBBBA § 70421(b)(4); Notice 2026-40 § 5.01(1). A 2018 tract therefore has no applicable start date, which put in doubt whether anyone could keep buying property in old zones after 2026.

The prong at issue is the acquired-by-purchase requirement of § 1400Z-2(d)(2)(D)(i)(I), not the substantially-all-use test. Section 5.01 of the Notice governs that acquisition requirement; the substantial-use element sits in § 1400Z-2(d)(2)(D)(i)(III) and is addressed separately in § 5.02(2), discussed below. For property acquired after December 31, 2026 for use in an old zone, the property cannot be QOZBP unless it is acquired for use in a zone designated after July 4, 2025 or one of two exceptions applies. Notice 2026-40 § 5.01(1). The two exceptions are these.

• (a) Working capital safe harbor (QOZBs only). Before December 31, 2026 the QOZB adopted a WCSH plan, received at least 10% of the plan’s total estimated working capital, and spent, or entered a binding agreement to spend, at least 5% of that working capital; and the later acquisitions are made substantially consistent with the plan. Property acquired under such a plan may satisfy the acquisition requirement of § 1400Z-2(d)(2)(D)(i)(I). Notice 2026-40 § 5.01(2)(b).
• (b) Ordinary-course replacement. The property is acquired to replace or modernize existing business property needed to keep operations running. This does not cover acquisitions for expansion of the business or transition into a new business. The Notice’s examples: an apartment building replacing windows, appliances, and flooring as units turn over qualifies; a restaurant modernizing its kitchen and point-of-sale system qualifies. Notice 2026-40 § 5.01(3).

The same dating problem reaches new QOZ stock and partnership interests, because applicable date keys off the earliest applicable start date of the QOZBP the business holds. A QOZB that owns any old-zone property is therefore closed to new qualifying equity issuances after 2026, unless the interests are acquired under the same written-plan safe harbor. Section 5.01(2)(c) supplies that cure: stock and partnership interests acquired after December 31, 2026 under a qualifying § 5.01(2) plan are treated as acquired after the applicable date for §§ 1400Z-2(d)(2)(B)(i)(I) and (C)(i). Notice 2026-40 § 5.01(2)(c).

4. How funds keep passing their tests after the old zones expire

Old-zone designations expire December 31, 2027 (Puerto Rico) and December 31, 2028 (everywhere else). Notice 2026-40 § 2.04(2)(c). Two core tests depend on a property or business being located in a QOZ: the substantially-all-use test and the 50%-gross-income test.

The Notice supplies safe harbors. An expired zone is treated as a QOZ through December 31, 2047 for:

• the substantially-all-use test, if the property would qualify but for expiration and was acquired either before expiration or under the exceptions in clarification 3 (§§ 5.01(2) or 5.01(3)). Notice 2026-40 § 5.02(2); and
• the 50%-gross-income test, if the QOZB began actively conducting its trade or business before expiration, or reasonably anticipates doing so under a qualifying § 5.01(2) plan. Notice 2026-40 § 5.02(3).

That 2047 runway is long enough to protect a ten-year hold begun late in an old zone’s life.

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Part II: What this means for developers

The working capital safe harbor is the bridge between the old zones and the new money

A properly documented pre-December 31, 2026 WCSH plan lets a sponsor keep deploying capital into an old zone in 2027 and beyond, including capital from a 2027-era fund. For a project sitting in a 2018-vintage zone, that is what determines whether the deal can keep funding after year-end 2026.

The reason is worth setting out, because the Notice cures two separate defects rather than one. On the property side, post-2026 purchases in an old zone fail the acquired-by-purchase requirement of § 1400Z-2(d)(2)(D)(i)(I), because the old zone has no applicable start date. OBBBA § 70421(c)(4)(A); Notice 2026-40 § 5.01(1). On the equity side, new QOZ stock and partnership interests fail the applicable-date requirement for the same reason, because applicable date keys off the QOZBP the business holds. OBBBA § 70421(c)(4)(B). Section 5.01(2) patches both: § 5.01(2)(b) deems the property to satisfy the acquisition requirement, and § 5.01(2)(c) deems stock and partnership interests acquired after December 31, 2026 under the same plan to be acquired after the applicable date. The Notice’s Example 5 works the equity side directly. A QOF acquires additional stock of a QOZB in December 2027, in a tract designated in 2018 and never redesignated for 2027, and because the cash was needed to complete development under the plan, the stock is treated as acquired after the applicable date under § 5.01(2)(c). Notice 2026-40 § 5.01(4)(v).

A structuring point follows. A QOZB does not need a QOF above it to exist. A sponsor can stand up a QOZB in 2026 that takes the initial developer or GP investment, reaches the 10% funding and 5% spend thresholds, and adopts its WCSH written plan before any QOF invests, then begins taking QOF capital in 2027. Structured that way, the old-zone tract keeps its location while the 2027 capital still earns the 2027 benefits.

It is worth being precise about why the 2027 capital still earns 2027 treatment, because the two questions are independent. The rolling five-year deferral and the basis step-up attach at the investor level and turn on when the cash goes into the fund. The OBBBA amendments to § 1400Z-2(b) and (c) are effective for amounts invested after December 31, 2026. OBBBA § 70421(c)(5)(A); Notice 2026-40 §§ 4.02, 5.02(1). The old-zone problem was never a benefits problem; it was a qualification problem at the QOZB tier. Section 5.01(2) cures the qualification defect for both the property and the equity, and § 5.02(2) keeps the tract treated as a zone through 2047 so the ten-year hold has somewhere to run. Cure qualification, and the benefits follow from the investment date.

The practical requirement is a deadline. For an old-zone project a sponsor intends to carry forward, the WCSH plan needs to be adopted, funded to 10%, and 5%-committed before December 31, 2026. That is a 2026 task, not a 2027 one.

Operating businesses can still stake out old zones for the income test

If the fund runs an operating business rather than holding real estate, it has room to stake out old zones for the 50%-gross-income test until they expire, the end of 2028 for most. A services business can headquarter in a new 2027 zone and still earn revenue from work performed in old zones through 2028, a bridge while the new map fills in. Notice 2026-40 § 5.02(3).

Pre-2026 inclusion-event gains can roll into a 2027 fund

Gain from a pre-December 31, 2026 inclusion event can be reinvested into a 2027 QOF, and it makes no difference whether the inclusion event came from selling the QOF interest or from something else, provided the investor no longer holds the original qualifying investment. Notice 2026-40 §§ 4.02, 4.03. The gain is not stranded by the program’s reset. It can carry forward into the post-2026 regime with the new five-year deferral and basis benefits attached. For sponsors raising 2027 capital, investors rolling off pre-2027 positions then have a reason to redeploy rather than cash out and pay the tax, which sustains demand for new QOF equity as the new zones come online.

Two cautions

First, the mechanics of the written-plan safe harbor for QOZ stock and partnership interests will need refinement. Section 5.01(2)(c) is explicit that interests acquired after December 31, 2026 under a qualifying plan are treated as acquired after the applicable date, and Example 5 works through a fund buying additional stock in December 2027 into a tract that was never redesignated. What the Notice does not resolve is how the written-plan requirement operates at the fund tier, since QOFs do not ordinarily maintain working capital plans of their own. The structure is sound; the documentation convention is what remains to be settled.

Second, this is a Notice, not a final regulation. It describes rules Treasury expects to propose, and several of them favor taxpayers. Reliance carries the usual risk that the proposed regulations come out differently, so positions should be documented to the Notice and revisited when the regulations issue. One clarification is more exposed than the others. The inclusion-event reinvestment conclusion rests on Treas. Reg. § 1.1400Z2(a)-1(b)(11)(iv), which addresses dispositions, applied against a statute that speaks of a sale or exchange. Because dispositions include events such as gifts that are not sales or exchanges, that is a category mismatch, and of the four clarifications it is the one most likely to move in the proposed regulations.

Bottom line

Notice 2026-40 gives developers a workable path to carry old-zone projects across the 2027 line and a long enough horizon to reach their ten-year holds. The constraint is the December 31, 2026 deadline built into the working-capital safe harbor. A sponsor with an old-zone deal it intends to keep funding has to adopt, fund to 10%, and partially spend against a written plan before year-end 2026.

Citations

Statutes

• 26 U.S.C. § 1400Z-1 (designation of qualified opportunity zones; 25% limitation applied per designation period; definition of “applicable start date” at § 1400Z-1(e)(2)).
• 26 U.S.C. § 1400Z-2 (gain deferral and exclusion; definitions of QOZ stock, QOZ partnership interest, and QOZBP; acquired-by-purchase requirement at (d)(2)(D)(i)(I); substantial-use element at (d)(2)(D)(i)(III); “applicable date” at (d)(2)(E); five-year deferral under (b); ten-year and thirty-year basis rules under (c)).
• One Big Beautiful Bill Act, Pub. L. No. 119-21, § 70421, 139 Stat. 72 (July 4, 2025) (making the OZ incentive permanent; adding the applicable-date and applicable-start-date regime; § 70421(c)(4)(A) amending the QOZBP acquisition date and (c)(4)(B) amending the QOZ stock and partnership-interest dates; § 70421(b)(4) limiting the applicable-start-date definition to post-enactment designations; effective dates at § 70421(c)(5)).

Administrative Authority

• Notice 2026-40, 2026-28 I.R.B. (July 6, 2026) (transitional OZ guidance; § 3.01 designation period and 25% limitation; § 4 investor transition, including § 4.01(2) and § 4.03 on reinvestment; § 5.01 acquisition requirement and the WCSH and ordinary-course exceptions, including § 5.01(2)(b), § 5.01(2)(c), and Example 5 at § 5.01(4)(v); § 5.02 post-expiration safe harbors through December 31, 2047).
• Treas. Reg. § 1.1400Z2(a)-1(b)(11)(iv) (treatment of inclusion-event gain as eligible gain for reinvestment).
• Rev. Proc. 2026-14, 2026-20 I.R.B. 910 (guidance to State chief executives on nominating tracts for designation effective January 1, 2027).

Secondary Authority

• Andrew Gradman, contemporaneous memorandum summarizing Notice 2026-40 (June 19, 2026) (framing of the two-defect analysis and the fund-tier written-plan question).