CONTINUING EDUCATION FOR TAX & FINANCIAL PROFESSIONALS

Tax Byte

Treasury and the IRS have issued transitional guidance bridging the original Opportunity Zone program to the restructured regime taking effect January 1, 2027, under OBBBA §70421. The guidance confirms a planning point worth flagging now: eligible gain realized on, before, or after December 31, 2026, is not locked into the old deadline. If the client makes a timely qualifying investment in a QOF on or after January 1, 2027, within the standard 180-day window, the gain can be deferred under IRC §1400Z-2(a) and picks up the 10% basis step-up (30% for a qualified rural opportunity fund) under §1400Z-2(b)(2)(B), benefits that apply only to post-2026 investments.

The Notice draws a hard line on the other side. A taxpayer holding a qualifying investment through December 31, 2026, must recognize the remaining deferred gain in that taxable year. That gain, sometimes called deemed included gain, can never become eligible gain for a new deferral election; the original §1400Z-2(a) election stays in effect with respect to it. No amount of it can be rolled into a new fund.

Tax Practitioner Planning

For a client selling appreciated property in the second half of 2026, holding off on funding a QOF until 2027 may be the stronger move, not the weaker one; it buys the higher step-up and the longer runway. The 180-day clock runs from the date of the sale or inclusion event, not from January 1, so track that date carefully. This does not help a client whose existing QOF investment faces the mandatory 12-31-26 inclusion; that gain comes due this year regardless of what happens afterward.

Sources:

For more tax developments, visit the Western CPE eTax Alerts page at westerncpe.com/etax-alerts/.

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