IRS plans qualified opportunity zone rules

The Internal Revenue Service and the Treasury Department plan to issue proposed regulations for qualified opportunity zones, the real estate developments for economically distressed communities that provided tax advantages for investors under the Tax Cuts and Jobs Act of 2017 and expanded under last year's One Big Beautiful Bill Act.

In Notice 2026-40, issued Thursday, the Treasury and the IRS noted that Section 1400Z-1 of the Internal Revenue Code provides the procedural rules for the designation of QOZs, the related definitions and the applicable period. Section 1400Z-2 allows the deferral of inclusion in gross income for certain realized gains to the extent that the corresponding amounts are timely invested in a corporation or partnership that meets the requirements to be certified as a qualified opportunity fund. If certain qualifications and holding period requirements are met, then a portion of the deferred gains can be excluded from gross income, and the gain on the taxpayer's investment of the amounts in a QOF may be excludable from gross income. 

The guidance clarifies a number of aspects, such as saying that the number of previously designated zones will not limit the number of census tracts a state is allowed to nominate for the designation period beginning Jan. 1, 2027. It also discusses the start dates and 10-year designation periods for zones certified after the enactment of the new tax law.

In addition, there are instructions on how to defer capital gains invested in qualified opportunity funds during the transition.