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. But it left a stack of timing questions unanswered — questions that matter enormously to anyone trying to raise and deploy 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. But it answers four questions that have been keeping fund sponsors and their counsel up at night, and the answers are, on balance, good news for developers.

Below is a plain-English summary of the four clarifications, followed by my read on what they mean if you’re the one raising the money and you have to live by the rules.

(Hat tip to Andrew Gradman, whose contemporaneous memo helped frame several of the points below.)

---

Part I — Some Clarifications

1. The 25% cap won’t choke 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 worry was arithmetic: the old zones don’t expire until the end of 2028, so would they eat into the 25% a governor can nominate for the new round starting in 2027?

The Notice says no. The 25% limit applies per ten-year designation round, not to the number of zones that happen to coexist at one moment. So the previously designated zones don’t count against the new nominations. The new designation period for tracts certified in 2026 runs January 1, 2027 through December 31, 2036.

2. When a 2027 reinvestment is allowed (and when it isn’t)

A common 2027 scenario: an investor has gain tied to a pre-2027 QOF — either from an inclusion event, or from the deemed inclusion that hits everyone still holding a pre-2027 investment on December 31, 2026 — and wants to roll it into a new QOF. Can they?

It depends on whether they still hold the original qualifying investment when they make the new one:

• Still holding it? No reinvestment. Under § 1400Z-2(a)(2), you can’t make a new deferral election on a gain for which a prior deferral election is still in effect.
• No longer holding it (the typical case when the gain came from selling the QOF interest)? You can reinvest.

3. New purchases of tangible property in “old” zones — generally out, with two important exceptions

OBBBA introduced two new 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 purchases beginning in 2027. For the new zones, the applicable start date is cleanly January 1, 2027. For the old zones, the term simply doesn’t apply — which created real doubt about whether anyone could keep buying property in old zones after 2026.

The Notice’s answer: for property acquired after December 31, 2026, old zones generally can’t be used to satisfy the QOZBP “substantially-all-use” test — but there are two exceptions. Property is treated as acquired by the applicable start date if either:

• (a) Working Capital Safe Harbor (WCSH) exception (QOZBs only). Before December 31, 2026 the QOZB (i) adopted a WCSH plan, (ii) received at least 10% of the plan’s total estimated working capital, and (iii) spent — or had a binding agreement to spend — at least 5% of that working capital; and the later property acquisitions are made substantially consistent with the plan.
• (b) Ordinary-course replacement exception. 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 own examples: an apartment building replacing windows, appliances, and flooring as units turn over (qualifies); a restaurant modernizing its kitchen and POS system (qualifies).

The same logic restricts new QOZ stock and partnership interests: because applicable date keys off the earliest applicable start date of the QOZBP a business holds, a QOZB that owns any old-zone property is effectively closed to new qualifying equity issuances after 2026 — unless the interests are bought under a qualifying written-plan safe harbor.

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). Two core tests depend on a property or business being in a QOZ: the substantially-all-use test and the 50%-gross-income test. What happens when the zone stops being a zone?

The Notice promises safe harbors. An expired zone will keep being 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; and
• The 50%-gross-income test, if the QOZB began actively conducting its trade or business before expiration (or has a qualifying WCSH).

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

---

Part II — What This Means for Developers

The Working Capital Safe Harbor is the bridge between the old zones and the new money

The single most valuable takeaway is that a properly documented pre-December 31, 2026 WCSH plan lets you keep deploying capital into an old zone well into 2027 and beyond — even from a 2027-era fund. For a developer with a project sitting in a 2018-vintage zone, this is the difference between a deal that dies at year-end 2026 and one that keeps funding.

There’s a structuring point worth flagging now: a QOZB does not need a QOF above it to exist. So it is possible to stand up a QOZB in 2026 that takes the initial developer/GP investment, hits 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, an old-zone tract keeps its location while the fresh capital still earns the 2027 benefits. I expect a lot of sponsors to spend the back half of 2026 working exactly this angle.

The practical to-do list is blunt: if you have an old-zone project you want to carry forward, the WCSH plan needs to be adopted, funded to 10%, and 5%-committed before the ball drops on 2026. This is a now problem, not a 2027 problem.

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

If your fund runs an operating business rather than holding real estate, you have room to stake out old zones for the 50%-gross-income test until they expire (end of 2028 for most). A services business can headquarter in a new 2027 zone yet still earn revenue from work performed in old zones through 2028 — a useful bridge while the new map fills in.

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

This one deserves to be underlined, because it keeps a large pool of capital in the game. The Notice concludes that 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. The gain is not stranded by the program’s reset; it can be carried forward into the permanent post-2026 regime, with the new five-year deferral and basis benefits attached.

For sponsors raising 2027 capital, that is a meaningful tailwind. Investors rolling off pre-2027 positions are not forced to simply cash out and pay the tax — they have a live reason to redeploy, which sustains demand for new QOF equity right as the new zones come online.

Two cautions before you build the deck

First, the “written plan” safe harbor for QOZ stock and partnership interests still needs clarification. QOFs don’t ordinarily have written plans, so exactly how this applies to fund-level equity remains unclear pending the proposed regulations.

Second, this is a Notice, not a final regulation. It describes rules Treasury “expects” to propose, and several of them land in favor of taxpayers. That is welcome, but reliance carries the usual risk that the proposed regulations come out differently. Document your positions to the Notice, and revisit them when the regulations issue.

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 hit their ten-year holds. The catch is the December 31, 2026 deadline baked into the working-capital safe harbor. If you have an old-zone deal you intend to keep funding, the planning clock is already running.