IRS Sets Safe Harbors Through 2047 for Pre-OBBBA Opportunity Zone Funds

The Treasury Department and the Internal Revenue Service issued Notice 2026-40 Thursday, providing transitional guidance for investors and qualified opportunity funds holding positions in zones designated under the original 2017 program – filling a critical regulatory gap created when Congress overhauled the opportunity zone framework last year under the One Big Beautiful Bill Act.

The notice previews proposed regulations Treasury and the IRS intend to issue. The forthcoming proposed rules are expected to mirror the transitional guidance provided in the notice.

The Problem

As AltsWire has reported extensively, the OBBBA made the opportunity zone program permanent and established a new 10-year designation cycle, with fresh zones investable beginning Jan. 1, 2027. But the overhaul created two structural compliance problems for the roughly 8,764 zones designated under the original Tax Cuts and Jobs Act framework and the funds operating within them.

The first problem involves property acquisition. The OBBBA rewrote the definition of qualified opportunity zone business property to require tangible property be acquired after the “applicable start date” – a term defined only for zones designated after the OBBBA’s July 4, 2025, enactment. Previously designated zones have no such date. That gap means property acquired by a QOF or QOZB in an original-program zone after Dec. 31, 2026, would technically fail to qualify as QOZBP under a plain reading of the amended statute – unless one of the exceptions provided in the notice applies.

The second problem involves zone expiration. The original zone designations expire on Dec. 31, 2028, for most zones, and Dec. 31, 2027, for Puerto Rico zones. But investors in those zones may hold qualifying investments for up to 10 years – in some cases, well past 2028 – and need assurance they can continue satisfying compliance tests after their zones lose designation status.

Guidance for Investors

For investors who deferred gains into a QOF on or before Dec. 31, 2026, the notice confirms that those deferred gains were required to be included in income in the taxable year that includes Dec. 31, 2026. That deemed inclusion does not, however, end the investment’s eligibility for the permanent exclusion of post-acquisition gain under Section 1400Z-2(c). The IRS confirmed that investors who recognized deemed included gain on Dec. 31, 2026, and continue to hold their qualifying investment remain eligible to make the basis step-up election on a later sale or exchange – provided they satisfy the 10-year holding period and other requirements through the date of disposition.

Critically, the notice clarifies that deemed included gain cannot be re-deferred into a new QOF investment. Because the original deferral election remains in effect, the IRS determined, the gain recognized on Dec. 31, 2026, cannot constitute “eligible gain” for purposes of a new election under Section 1400Z-2(a).

For gains realized on or before Dec. 31, 2026, but invested in a QOF on or after Jan. 1, 2027, the OBBBA’s more favorable rules apply. Those investments are subject to a five-year mandatory inclusion period rather than the Dec. 31, 2026, deadline, and qualify for the 10% basis step-up – or 30% for investments in qualified rural opportunity funds – at the five-year mark.

Safe Harbors for QOFs and QOZBs

The notice’s most consequential relief addresses property acquisition and ongoing compliance for funds and businesses operating in previously designated zones.

On property acquisition, the notice establishes two exceptions to the general rule that property acquired after Dec. 31, 2026, in a previously designated zone cannot qualify as QOZBP.

The first exception applies to property acquired pursuant to a working capital safe harbor plan adopted on or before Dec. 31, 2026. To qualify, a QOZB must have received at least 10% of the total estimated working capital assets designated under the plan by Dec. 31, 2026, and must have expended at least 5% of those estimated assets by that date – with amounts owed under binding agreements entered before Jan. 1, 2027, counting as expended. Property acquired after Dec. 31, 2026, in a manner substantially consistent with such a plan may still qualify as QOZBP. The notice illustrates this exception with a large mixed-use development scenario spanning commercial and residential phases, in which the fund’s pre-existing written plan covers property acquisitions extending well into 2028 and 2029.

The second exception covers ordinary course business replacements. Tangible property acquired after Dec. 31, 2026, to replace existing tangible business property in the ordinary course of a trade or business in a previously designated zone may still qualify as QOZBP. The notice defines ordinary course replacements to include replacement or modernization of property necessary to continue operations – but explicitly excludes property acquired for expansion into new capacity or a new line of business. The notice illustrates the distinction with three examples: a manufacturer adding a warehouse to expand production capacity (does not qualify), an apartment building replacing windows, appliances, and fixtures during unit renovations (qualifies), and a restaurant modernizing its kitchen with a new ventilation system and point-of-sale system (qualifies).

On post-expiration compliance, the notice establishes two safe harbors extending through Dec. 31, 2047. A QOF or QOZB that acquires qualifying property on or before its zone’s designation expiration date – or pursuant to the working capital or ordinary course replacement exceptions – may continue to treat the previously designated zone as a QOZ for purposes of the “substantially all use” requirement through Dec. 31, 2047. Separately, a QOZB that has begun to actively conduct business in a previously designated zone before its designation expires – or that reasonably anticipates doing so under a qualifying written plan – may continue treating that zone as a QOZ for purposes of the 50% gross income and intangible property tests through Dec. 31, 2047.

What’s Next

The notice applies to taxable years ending after its issuance date. Treasury and the IRS stated that proposed regulations, once finalized, would also apply to taxable years ending after the notice’s public issuance date. The guidance is the latest in a series of regulatory actions implementing the OBBBA’s OZ overhaul. The agency previously issued Notice 2025-50 addressing rural zone investment rules, and Revenue Procedure 2026-14 establishing the nomination process for new zone designations effective Jan. 1, 2027, with the 90-day state nomination window opening July 1.

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