While the One Big Beautiful Bill Act (OBBB) permanently extended and enhanced many Opportunity Zone incentives (Opens a new window), it left several important transition questions unanswered for investments located in Qualified Opportunity Zone (QOZ) census tracts that will expire at the end of 2026 under the original Opportunity Zone (OZ) regime, including:

• • How far a project must progress before a tract expires
  • Whether additional capital could be raised and deployed after expiration
  • How existing investments could continue satisfying Opportunity Zone compliance requirements once a census tract is no longer designated as a QOZ

Notice 2026-40 (PDF) (Opens a new window), released by the Treasury Department and IRS on June 18, provides much-needed guidance on these matters and more. Read on for key takeaways and action items – plus, a reminder about the Dec. 31 deferred gain recognition event applicable to legacy QOF investments.

Key developments for existing Opportunity Zone investments

Notice 2026-40 provides welcome certainty by establishing a safe harbor framework focused on whether an OZ business has a valid working capital safe harbor plan in place. Under the guidance, businesses generally must satisfy certain milestones, including receiving at least 10% of their estimated working capital needs and entering into binding agreements to expend at least 5% of anticipated working capital costs by Dec. 31, 2026. See the notice for further considerations.  This framework provides a clearer path forward for projects located in QOZ census tracts approaching expiration.

The Notice also includes a taxpayer-favorable provision permitting continued investment in an OZ business located in an expired census tract when the investment is used to replace or modernize assets necessary to continue the existing trade or business. This relief may be particularly valuable for operating businesses and real estate projects that require ongoing capital investment to complete development or maintain operations after a tract’s expiration. However, investments intended to significantly expand operations or transition the business into a new trade or business generally do not qualify for this relief.

In addition, the IRS clarified that businesses and funds located in expired OZ census tracts will not fail the Opportunity Zone compliance requirements solely because the underlying census tract is no longer designated as a Qualified Opportunity Zone. This clarification removes a significant area of uncertainty for investors, developers, and fund sponsors with long-term OZ investments.

The Notice also confirms that investors who made valid investments under the original OZ regime retain eligibility for the program’s 10-year fair market value election. As a result, the transition to OZ 2.0 does not affect the ability of legacy OZ investors to exclude post-investment appreciation from taxable income, provided the applicable holding period requirements are satisfied. In addition, the IRS clarified that gain recognized as part of the mandatory Dec. 31, 2026, inclusion event cannot be reinvested into a new Qualified Opportunity Fund (QOF) and deferred a second time. However, gain recognized from certain inclusion events occurring before Dec. 31, 2026, may generate a new 180-day investment period and may qualify for OZ 2.0 benefits if reinvested in a QOF after Jan. 1, 2027.

Important planning considerations

Deadlines: Although the guidance provides several favorable developments, investors should be aware that the new safe harbor framework generally requires certain milestones to be met by Dec. 31, 2026, including the working capital-related funding and expenditure requirements described above. This deadline precedes the statutory expiration date applicable to current Opportunity Zones and may affect the timing of future capital raises and project development efforts. Investors with projects in active development should assess whether existing timelines, financing arrangements, and planned expenditures align with the new requirements.

Documentation: Investors should also review existing working capital plans and maintain appropriate documentation supporting future capital expenditures. Businesses intending to rely on the modernization and replacement-property exception should carefully document how planned investments support the continuation of existing operations. Often it will make sense to review – and fund – the working capital safe harbor amounts before Dec. 31, 2026.

Potential tax savings opportunity for legacy QOF investors

Beyond the guidance affecting expiring Opportunity Zones, investors should also consider the approaching Dec. 31, 2026, deferred gain recognition event applicable to legacy QOF investments. Under current law, taxpayers generally must recognize previously deferred gain on Dec. 31, 2026, regardless of whether they have sold their QOF investment or received sufficient liquidity to fund the resulting tax liability.

Importantly, the Opportunity Zone rules contain a potentially valuable limitation that caps the amount of gain recognized at the lesser of the taxpayer's remaining deferred gain or the fair market value (FMV) of the taxpayer’s QOF interest on the inclusion date, less the investor’s basis in the QOF. Because the relevant valuation is based on the value of the investor's QOF stock or partnership interest – not merely a pro rata share of the fund's underlying net asset value – some investors may be able to reduce the amount of gain recognized where the value of the investment interest is lower than the deferred gain amount.

As a result, investors with significant legacy QOF investments may wish to evaluate as soon as possible whether obtaining a qualified, independent appraisal of their QOF interest before the Dec. 31, 2026, inclusion date could provide tax savings opportunities and support reporting positions reflected on their tax returns. Given the large number of investors potentially affected by the 2026 inclusion event, appraisal resources may become constrained as the deadline approaches.

What investors should do now

With Notice 2026-40 now providing a framework for investments in expiring Opportunity Zones, investors should:

• • Review existing OZ projects to determine whether they can satisfy the new safe harbor requirements and evaluate whether current working capital plans and capital deployment schedules remain aligned with project objectives.
  • Assess whether future capital expenditures qualify as replacement and modernization investments that are eligible for continued OZ treatment following census tract expiration.

In addition, taxpayers with legacy Qualified Opportunity Fund investments should identify interests that will be subject to the Dec. 31, 2026, deferred gain recognition event and evaluate whether obtaining an independent appraisal of the QOF stock or partnership interest could provide meaningful tax planning benefits under the statutory fair market value limitation.

Finally, investors should continue monitoring future IRS and Treasury guidance, as additional transition relief or clarifications could affect both compliance obligations and planning opportunities.

Looking ahead

Notice 2026-40 provides meaningful certainty for investors with projects located in Opportunity Zones approaching expiration. The guidance establishes a practical framework for continued investment, clarifies ongoing compliance requirements, and offers additional flexibility for businesses that need to reinvest in existing operations.

At the same time, investors should not overlook the significant planning opportunities and compliance considerations associated with the Dec. 31, 2026, deferred gain recognition deadline. Early planning may help position investors to maximize available tax benefits while reducing future uncertainty.

Contact your trusted advisor for questions about how Notice 2026-40 may affect your Opportunity Zone investments, capital deployment plans, or deferred gain recognition strategy.