The IRS has announced its intent to issue proposed regulations and transitional guidance on qualified opportunity zones (QOZs) as revised by the One, Big, Beautiful Bill Act (OBBBA), the Republicans’ 2025 tax and spending law. Notice 2026-40 provides important guidance for fund sponsors and investors navigating the shift to OBBBA’s new designation system.
Under prior law, no more than 25% of a state’s low-income community census tracts could be designated as QOZs, with designations running through 2028 (2027 for Puerto Rico). OBBBA replaces this one-time designation with a recurring process, raising the question of whether previously designated tracts would count against a state’s 25% cap going forward.
Previously designated QOZs will not reduce the number of census tracts a state’s chief executive may nominate for the designation period beginning January 1, 2027. Each designation period is evaluated independently. For zones certified during 2026, the designation period runs January 1, 2027 through December 31, 2036, a 10-year window starting on the “applicable start date” (the January 1 following certification).
The notice also clarifies gain deferral mechanics. Gains realized on or before December 31, 2026, and invested in a qualified opportunity fund (QOF) by that date remain governed by prior rules, generally requiring recognition by the earlier of an inclusion event or December 31, 2026. Taxpayers still holding a qualifying investment on that date must recognize “deemed included gain,” but their original deferral election remains in effect, preserving eligibility for a future basis step-up.
For gains invested in a QOF on or after January 1, 2027, the OBBBA’s new five-year inclusion timeline and revised basis adjustments apply. Inclusion event gain, defined as gain triggered by an event other than the original sale, can still qualify for deferral if reinvested within 180 days.
A key transitional issue involves tangible property acquired by QOFs and QOZBs after 2026 for use in zones designated under prior law. Because such “previously designated” zones lack an OBBBA “applicable start date,” such property generally cannot qualify as qualified opportunity zone business property unless it falls within one of two exceptions. Those exceptions consist of: (1) property acquired under a pre-2027 written working capital plan meeting existing safe harbor requirements, or (2) property acquired as an ordinary-course replacement of existing business property, rather than a business expansion.
Notice 2026-40 offers welcome certainty for the 2027 designation cycle and a roadmap for funds managing pre-OBBBA investments through the transition. Sponsors and investors should review existing working capital plans and acquisition timelines now to confirm they fit within the notice’s safe harbors before year-end. For more information about this update, contact Liskow attorneys Leon Rittenberg III, Caroline Lafourcade, and Kevin Naccari, and visit Liskow’s Tax Practice page.