Opportunity Zones Are Given New Life – A Tax Advisor's Thoughts

ARTICLE | March 05, 2026

Authored by Aprio, LLP

On July 4, 2025, Congress passed the One Big Beautiful Bill Act (OBBBA), breathing new life into the Opportunity Zone program. For multifamily residential real estate investors, the Opportunity Zone 2.0 program (OZ 2.0) presents new opportunities and long-term tax advantages.

Opportunity Zones 1.0: A brief refresher

The original Opportunity Zone program (OZ 1.0), launched in 2017 as part of the Tax Cuts and Jobs Act, was created to encourage investment in economically distressed areas through strong tax incentives. The program’s incentives were powerful, but the phaseout of some incentives may have detracted from the investment appeal in recent years.

There are three core tax benefits for an Opportunity Zone investor:

1. Capital gain deferral: Tax on the eligible capital gain under OZ 1.0 is deferred until December 31, 2026, at the latest.
2. Permanent exclusion for part of the originally deferred gain: If an OZ 1.0 investment is held for five years prior to December 31, 2026, then 10% of that originally deferred gain is permanently excluded from taxation. If held for seven years prior to December 31, 2026, an additional 5% is permanently excluded, for a total of 15% permanent exclusion.
3. Tax-free appreciation on qualified investment: After a qualified investment is held for 10 years, the appreciation on that investment is excluded from taxation.

For example, Todd sold a rental property in January 2019, realizing a $300,000 capital gain. Instead of paying tax on that gain right away, Todd invested $300,000 into a Qualified Opportunity Fund (QOF) in April 2019.

1. By investing in the QOF, Todd deferred his tax bill on the $300,000 capital gain until as far as December 31, 2026.
2. By December 31, 2026, Todd will have held his qualified investment for seven years, making him eligible for the full 15% permanent exclusion. When it’s time to recognize the $300,000 gain, he will be able to exclude $45,000 of the gain from taxable income ($300,000 x 15% = $45,000).
3. And finally, if Todd continued to hold his investment for the full 10-year holding period, he can exclude the appreciation gain on his original investment. Let’s assume his original $300,000 investment appreciated over 10 years to $750,000. The $450,000 ($750,000 less $300,000) gain upon sale of his investment will be excluded from income, resulting in tax-free growth on his qualified investment.

The original OZ 1.0 program included a “cliff:” The deferral and partial exclusion incentives were set to end on December 31, 2026. This meant that as time passed, the benefits diminished. By 2022, both the five- and seven-year holding period benefits were fully phased out. As taxpayers moved closer to 2026, the gain deferral was also worth less each passing year. Only the permanent exclusion of appreciation on the qualified investment after 10 years continued to be available in full.

Timing matters

In the world of Opportunity Zones, timelines are critical. The length of time an investment is held is one of the keys to achieving the tax benefits. QOFs must meet several timing-related requirements, including semi-annual eligibility testing, investing capital into qualifying property within specific deadlines, and improving existing property within a set timeframe.

Perhaps the most important timeline is the first one: A taxpayer has 180 days from the capital gain trigger date to reinvest funds into a QOF. For gains coming from passthrough entities, such as a partnership or S corporation, there are multiple deferral periods available if the entity did not elect to defer the gain already. In this case, the 180-day period can begin on (1) the passthrough entity’s year-end, (2) the passthrough’s underlying gain trigger date, or (3) the passthrough entity’s initial tax return due date. It’s worth noting the flexibility this provides to taxpayers. Additionally, a taxpayer may use multiple 180-day periods for multiple investments related to the same gain, so long as each portion of the gain is only deferred once.

What’s new with OZ 2.0?

The Opportunity Zone program was expanded and made permanent by OBBBA. Here are the major changes for OZ 2.0 investments:

• The program is now permanent. There are no investment cliffs, which creates more certainty for investors.
• OZ 2.0 investments can receive a five-year deferral of the original gain, without concern for a “cliff.”
• There will be new zones every 10 years, starting January 1, 2027. The next round of zone nomination and designation will begin July 1, 2026.
• The new zones will have to abide by stricter low-income qualifications. Zones adjacent to low-income census tracts are no longer eligible.
• Rural opportunity zone investments were introduced. Rural zones are eligible for increased tax benefits and more lenient development requirements.
• The partial exclusion benefit has been consolidated for one five-year holding period, creating a 10% permanent exclusion on the originally deferred gain. Rural zone investments will be eligible for a 30% permanent exclusion.
• The 10-year appreciation exclusion remains for OZ 2.0, for up to 30 years.

Opportunity Zones – Where are they?

The current Zones were designated in 2018 and are set to expire at the end of 2028. There are online maps that allow you to evaluate whether an address is inside the current Zones.

Beginning July 1, 2026, states will have the opportunity to nominate a new round of Opportunity Zones for investment beginning January 1, 2027. The new zones will be subject to new eligibility rules. The median income requirements for a low-income census tract are lower than the OZ 1.0 rules meaning less tracts may qualify for nomination. Within these new census tracts, a census tract that is comprised of a Rural Area will be eligible for a greater benefit, as noted above. As the discussion around the next round of Opportunity Zone designations begins, now is the time to stay informed and engaged. You can help advocate for communities in need of investment by sharing your input with local and state officials during, and leading up to, the nomination process.

Under the permanent program, new zones will be nominated and designated through this same process every 10 years. This will create new opportunities for investment and economic development across the country.

Step back: What’s on the Opportunity Zone horizon?

On December 31, 2026, gains that were previously deferred are going to come back into income. We recommend working closely with your tax advisor to ensure you are prepared for this “phantom income” tax event.

The amount that will be includible in income is the lesser of:

1. The originally deferred gain less adjustments for the five- and seven-year holding periods, or
2. The fair market value (FMV) of the investment (with special rules for investments in partnerships and S corporations, which are treated as though there was a hypothetical sale of the interest).

For investments that might have a fair market value less than the originally deferred gain, there may be planning opportunities to consider. First, consider your outlook on the investment’s potential. If the investment is still on track to provide the long-term returns you are looking for, but the FMV is currently lower due to the project’s progress and/or the current economic environment, consider determining FMV of the investment to guard against overpaying tax on your 2026 tax return.

Second, if the investment has gone south and it’s time to get out, consider options to trigger your original gain and provide you with the option to re-defer that gain into a new Opportunity Zone investment, including into the new OZ 2.0 program, and receiving a new five-year deferral window.

For investors with upcoming gain inclusion in 2026, consider your liquidity needs. Here are some ideas to consider with a tax advisor for your unique tax situation:

• Refinance a property to make a distribution to the investors. Care should be taken before making distributions to Opportunity Zone investors to ensure qualified investment status is maintained,
• Set aside upcoming cash flow distributions,
• Intentionally time capital loss recognition to match the capital gain recognition in 2026, or
• Similarly, a cost segregation study for some real estate investors may provide depreciation deductions to offset certain gains.

Investors will need to consider this additional gain as part of their 2026 estimated tax payments as well.

Prepare for your next Opportunity Zone move

The Opportunity Zone program incentivizes triggering capital gains to unlock the three key tax benefits noted above. Unlike a Section 1031 exchange for real estate, an Opportunity Zone gain deferral and QOF investment doesn’t require the cash to come directly from the original sale. The only tie to the original gain deferred is that the investment must be equal to or less than the gain amount.

If you have capital gains on your 2025 return, review the 180-day timeline for reinvestment. For passthrough entities, recall there may be an opportunity to invest in 2026 and defer the 2025 capital gain for a year. For sales that have been finalized, and the gain is already reported in 2025, the OZ 1.0 rules will apply, offering a one-year deferral and long-term appreciation exclusion until 2047

If you’re looking ahead at future gains, review your portfolio and investment strategy. Then ask:

1. Are there any capital gains you could trigger?
2. Can you control the timing?

Gains with flexible timing may allow for a 2026 sale, with a 2027 reinvestment and participation in the OZ 2.0 program. The timing of the 180-day window and the reinvestment period are key.

If the timing works, the OZ 2.0 program allows for up to a 5-year gain deferral, the potential 10% permanent exclusion on gain for non-Rural investments and 30% permanent exclusion on gain for Rural investments, along with a longer 30-year horizon for the tax-free appreciation benefit.

Is an Opportunity Zone investment right for you?

Opportunity Zone investments are not a one-size-fits-all option. The tax incentives alone won’t turn a bad investment into a good one. It’s important to remain within your investment strategy and not stray from that for the tax benefits alone. For those looking to diversify their portfolio or move on from low basis and high-value assets, the opportunity zone incentives can enhance after-tax returns for a solid investment. The program has matured since the beginning of OZ 1.0. Developers can defer gains into their own projects, while investors uninterested in direct development can access institutional QOFs or even a closely held Fund.

As noted, Opportunity Zone investments can be ideal for assets with low basis and substantial appreciation. This can be the case for investors who have been on the Section 1031 exchange path and now have little remaining basis for depreciation deductions on their high-value properties. While 1031 exchanges are powerful, it can be difficult at times to exit due to this problem. An Opportunity Zone investment may be a viable off ramp. Pairing with a cost segregation study to produce accelerated depreciation deductions to offset other eligible income enhances the after-tax returns even further.

Alternatively, owners selling their business may be navigating the prospect of a large tax bill. Combining the Opportunity Zone deferral with strategies like direct-indexing tax loss harvesting have been shown to significantly reduce taxes while supporting a diversified investment approach.

Please connect with your advisor if you have any questions about this article.

This article was written by Aprio and originally appeared on 2026-03-05. Reprinted with permission from Aprio LLP.
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