QOZ Update: IRS Notice 2026-40 and the Dec 31, 2026 Deadline
If you rolled a capital gain into a Qualified Opportunity Fund, or you are weighing one now, the ground is shifting. The Qualified Opportunity Zones incentive was created by the Tax Cuts and Jobs Act, refined in 2018, and has now been amended again by the OBBBA. IRS Notice 2026-40 bridges the old and new rules, and it carries a deadline you should not miss.
At SW Accounting & Consulting Corp, we help Los Angeles investors and fund sponsors plan around the Opportunity Zone rules. Below: what the IRS announced, how the incentive works, the key December 31, 2026 date, and what to watch for next.
What did the IRS announce in Notice 2026-40? 📜
The Treasury Department and the IRS intend to issue proposed regulations on Qualified Opportunity Zones under §§ 1400Z-1 and 1400Z-2, as amended by § 70421 of the One, Big, Beautiful Bill Act.
Notice 2026-40, titled “Transitional Guidance on Qualified Opportunity Zones under §§ 1400Z-1 and 1400Z-2,” tells taxpayers that forthcoming proposed regulations are anticipated to contain rules similar to those described in the notice itself. In other words, the IRS is signaling its direction now so taxpayers are not left guessing while the formal regulations are written. The notice distinguishes between the “prior” §§ 1400Z-1 and 1400Z-2 (as in effect after the TCJA and the Bipartisan Budget Act of 2018) and the sections as amended by the OBBBA.
How does a Qualified Opportunity Fund work? 🏗️
Section 1400Z-2 lets a taxpayer defer tax on a realized gain by timely investing a corresponding amount in a Qualified Opportunity Fund (QOF) — and, if holding periods are met, exclude part of the deferred gain and the appreciation on the QOF investment.
A QOF is a corporation or partnership organized to invest in qualified opportunity zone property, and it must hold at least 90 percent of its assets in that property (the 90-percent investment standard). A qualified opportunity zone business must, in turn, satisfy several tests — including that at least 50 percent of its total gross income comes from the active conduct of a trade or business in the zone, and that at least 70 percent (by value) of the tangible property it owns or leases is qualified opportunity zone business property. These structural tests are what make the incentive a real economic-development tool rather than a simple tax shelter.
Why does December 31, 2026 matter? 🗓️
For gains deferred under the prior rules, the deferred amount is generally included in income no later than December 31, 2026.
The original Opportunity Zone deferral was never permanent. Under prior § 1400Z-2, a taxpayer who elected to defer a gain must recognize it on the earlier of the date the QOF investment is sold or December 31, 2026. That means many investors will report their deferred gain on their 2026 tax return — filed in 2027 — even if they continue to hold the QOF investment. Planning for the cash needed to pay that tax, and confirming your basis, should happen now, not next spring.
| Requirement / date | What it means |
|---|---|
| QOF 90% asset test | A fund must hold at least 90% of assets in qualified opportunity zone property. |
| QOZ business — 70% / 50% | 70% of tangible property must be zone property; 50% of gross income from active conduct in the zone. |
| Dec 31, 2026 | Deferred gains under the prior rules are generally included in income by this date. |
| Forthcoming proposed regs | IRS will issue proposed regulations implementing the OBBBA amendments to §§ 1400Z-1/1400Z-2. |
We treat the December 31, 2026 inclusion date as a cash-planning event, not just a filing item. For clients holding a QOF investment, we project the deferred gain that will hit the 2026 return, confirm the holding-period basis step-up they have earned, and coordinate the tax payment with the rest of their year-end picture — so the bill is funded before it is due.
What changed under the One, Big, Beautiful Bill? 🔁
Section 70421 of the OBBBA amended §§ 1400Z-1 and 1400Z-2, and the IRS will implement those changes through the proposed regulations previewed in Notice 2026-40.
The notice repeatedly separates “prior § 1400Z-1/1400Z-2” from the sections “as amended by § 70421 of the OBBBA,” which is the IRS’s way of telling taxpayers that two sets of rules now coexist: one governing investments made under the original program, and one governing the renewed program. Until the proposed regulations are published and finalized, investors and fund sponsors should rely on the transitional rules in the notice and watch for the IRS’s next release before structuring new deals.
Two common traps: (1) assuming the deferral lasts until you sell — for prior-law gains it generally ends December 31, 2026 regardless; and (2) structuring a new QOF deal on old assumptions before the OBBBA proposed regulations are out. Confirm which rule set applies to each investment, and fund the 2026 tax in advance.
- IRS Notice 2026-40 previews proposed regulations for Opportunity Zones under §§ 1400Z-1/1400Z-2, as amended by the OBBBA.
- A QOF must hold ≥90% of assets in zone property; zone businesses face 70% tangible-property and 50% active-income tests.
- Gains deferred under the prior rules are generally included in income by December 31, 2026.
- Two rule sets now coexist — confirm which applies before structuring new deals.
Frequently asked questions
It is transitional guidance announcing that Treasury and the IRS intend to issue proposed regulations on Qualified Opportunity Zones under §§ 1400Z-1 and 1400Z-2, as amended by the One, Big, Beautiful Bill Act.
For gains deferred under the prior rules, the deferred amount is generally included in income on the earlier of the date you sell the QOF investment or December 31, 2026.
A QOF must hold at least 90 percent of its assets in qualified opportunity zone property, measured on the testing dates in § 1400Z-2(d)(1).
Yes. Section 70421 of the OBBBA amended §§ 1400Z-1 and 1400Z-2. The IRS will implement those amendments through the proposed regulations previewed in Notice 2026-40.
How can SW Accounting help? 💼
At SW Accounting & Consulting Corp, we help LA-area investors and fund sponsors navigate the Opportunity Zone rules — projecting the December 31, 2026 gain inclusion, confirming holding-period basis adjustments, evaluating QOF and zone-business compliance with the 90%, 70%, and 50% tests, and monitoring the forthcoming OBBBA proposed regulations so your next move is built on current law.
📩 Plan your Opportunity Zone strategy
Disclaimer: This article is for informational purposes only and is not tax or legal advice. Consult a qualified professional about your specific situation. Primary sources: IRS Notice 2026-40 (Transitional Guidance on Qualified Opportunity Zones); 26 U.S.C. §§ 1400Z-1 and 1400Z-2; the One, Big, Beautiful Bill Act (Pub. L. 119-21, § 70421); Treasury Regulations § 1.1400Z2.
