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If an investor has a capital gain in the second half of 2026, there is an interesting planning opportunity for qualified opportunity zone investments. Through the quirks in the timing rules, an investor can take advantage of either QOZ 1.0 or QOZ 2.0. Either way, careful planning is required to maximize the investment and avoid any pitfalls.

The "One Big Beautiful Bill Act" (OBBBA), signed into law on July 4, 2025, has ushered in the new Qualified Opportunity Zone (QOZ) program, known as QOZ 2.0. Originally established in 2017 to spur economic development in distressed communities, the OBBA has refined the QOZ incentive and made it permanent. 

Summary of Key Changes Beginning in 2027

• Rolling Gain Deferral: For investments made after December 31, 2026, the temporary deferral of capital gains now operates on a rolling five-year basis. Gains deferred through investment in a Qualified Opportunity Fund (QOF) will be recognized on the fifth anniversary of the investment date, rather than a fixed end-date. This offers greater flexibility for investors.
• Streamlined Basis Step-Up: The OBBBA simplifies the basis step-up benefit. A 10% basis step-up will apply for investments held in a QOF for at least five years. The previous incremental step-ups (at 5 and 7 years) have been eliminated, capping the benefit at 10% for investments made after December 31, 2026.
• Enhanced Rural Focus: The OBBBA provides greater incentives for investments in rural areas. Qualified Rural Opportunity Funds (QROFs), which have at least 90% of assets invested in rural QOZs, are eligible for a 30% basis step-up after 5 years (instead of the standard 10%). Additionally, the "substantial improvement" threshold for properties in rural QOZs is reduced, making it easier for projects to qualify. Under this new threshold, only an excess of 50% of adjusted basis must be reinvested in property improvements in the QROF, as opposed to 1005 of adjusted basis in standard QOFs.
• Increased Reporting Requirements: The OBBBA introduces more stringent reporting requirements for QOFs and QOZ businesses, aiming to enhance transparency and track the program's impact.

Opportunities for 2026

For capital gains in the first half of 2026, there was no opportunity for deferral, as QOZ 1.0 only defers the capital gains until the end of 2026. For investors with recognized capital gains in the second half of 2026, the capital gains can be invested in a QOZ project before December 31, 2026 and still receive the limited benefits of QOZ 1.0. However, these investors have a new opportunity because the investment deadline of those rollover capital gains now falls into 2027. If an investor holds that cash until after January 1, 2027, the benefits of QOZ 2.0 will apply. This means, most importantly, that the capital gains can be deferred for five years under QOZ 2.0, rather than losing out on the capital gain deferral completely.

Note that all of the rules of QOZ 2.0 will apply if this route is taken. So, any investors should be sure to consult with their tax advisors before making this decision.

Disclaimer: This article provides a general overview only and should not be considered tax or investment advice. Consult with a qualified professional for personalized guidance.

Mr. Shimick is a Partner at Whiteman Osterman & Hanna, LLP and the leader of the firm’s Federal and State Taxation Practice Group. You can contact him at (518) 487-7678 or by email at sshimick@woh.com.