Opportunity Zone deferral moves from a fixed 2026 deadline to a rolling five-year clock

The federal Opportunity Zone program lets investors defer federal tax on capital gains that they invest in a Qualified Opportunity Fund, which in turn invests in designated low-income areas. Congress created the program in the Tax Cuts and Jobs Act of 2017, and 8,764 census tracts were designated in July 2018. The One Big Beautiful Bill Act, signed July 4, 2025, changed the program’s deferral timing, basis increases, rural rules and designation schedule.

For a founder, the program can matter through the investors and funds that put money into a business located in a zone. The changes alter when deferred tax comes due, how large the basis increase is, and which property and location tests a fund must meet. The sections below set out the rules as the statute, HUD, the IRS and a law-firm summary describe them, and note where those sources differ.

The original 2017 deferral and the dates that remain

Under the original rules, an investor who reinvested a capital gain in a Qualified Opportunity Fund could defer tax on that gain. The deferred amount was included in income at the earlier of a sale of the investment or December 31, 2026. The Cornell Legal Information Institute reproduces that original text in the statute page, alongside the amended version.

Investors who held longer could also reduce the taxable amount. HUD lists a 15% basis increase for investments held seven years and made by December 31, 2019, and a 10% increase for investments held five years and made by December 31, 2021. Both of those dates have passed. The December 31, 2026 deadline has not.

The IRS describes the program as created under Public Law 115-97, the 2017 tax act, and says it lets taxpayers defer tax on eligible gains through a Qualified Opportunity Fund.

Key dates
HUD reports that the One Big Beautiful Bill Act was signed on July 4, 2025. It also lists July 9, 2018 as the date the original 8,764 census tracts were designated.

A five-year rolling deferral and the new basis increases

The 2025 amendment replaces the fixed date with a clock that starts with each investment. For amounts invested in a fund after December 31, 2026, the deferred gain is included in income at the earlier of a sale or exchange, or five years after the investment was made. The amendment is section 70421 of Public Law 119-21, and it applies to amounts invested after that date.

If the investment is held for at least five years, the basis increases by 10% of the deferred gain. The statute treats that increase as occurring before the inclusion date. Cozen’s summary puts the result in plain terms: an investor who holds for five years pays tax on 90% of the deferred gain.

For investments in a qualified rural opportunity fund, the statute replaces the 10% figure with 30%. Cozen describes this as a rolling 30% step-up after five years, compared with 10% for other funds.

Gain on an investment held for at least 10 years remains untaxed, according to Cozen. The HUD and Cozen summaries describe the timeline for the longer-term exclusion in different terms, discussed below.

Rural funds face a 90% test and a 50% improvement threshold

Cozen states that a qualified rural opportunity fund must hold its 90% asset amount in property located in a zone comprised entirely of a rural area. HUD gives the same 90% standard for funds generally, with the rural requirement applied on top of it.

The statute defines rural area as any area other than a city or town with more than 50,000 inhabitants, and any urbanized area that is contiguous and adjacent to such a city or town. HUD uses the same definition.

The substantial improvement requirement is also lower for rural property. HUD says the threshold fell from 100% of adjusted basis to 50% for rural investments, effective July 4, 2025, the date the law was enacted.

Treasury’s Notice 2025-50, issued September 30, 2025, identified 3,309 of the 8,764 original tracts as rural, HUD reports. The IRS lists the same notice under a title about substantial improvement of property in rural areas. Cornell’s note on the statute dates the amendments in paragraph (4)(A) and (B) to property acquired after December 31, 2026; it does not give that date for the 50% rural change, which HUD dates from July 4, 2025.

The fixed 2026 deadline is being replaced by a clock that starts when each investment is made.

A narrower low-income test and a 10-year designation cycle

HUD’s summary of the new law sets the low-income test at median family income of no more than 70% of area median income, or a poverty rate of at least 20% with median family income at or below 125% of area median. Cozen describes the rules before the new law as using an 80% median income figure, the test the new law narrows.

The contiguous-tract rule ends. HUD says contiguous tracts are explicitly prohibited under the new program, and Cozen says the rule is eliminated. Puerto Rico’s treatment also changes. HUD lists December 31, 2027 as the expiry for original Puerto Rico tracts, and Cozen says the island’s special designation benefits end.

Designations will now occur every 10 years, with governors nominating tracts and Treasury certifying them. HUD says a new census tract determination period begins July 1, 2026. Governors’ nominations were due September 28, 2026, and the deadline becomes October 28, 2026 if a governor requests an extension.

HUD expects the new zones to take effect January 1, 2027, and estimates about 6,500 tracts. Its timeline gives two different timeframes for Treasury’s first certifications on the same page: fall or winter 2026 in one place and the fourth quarter of 2026 in another.

Where the sources disagree or leave gaps

HUD’s timeline gives December 31, 2028 as the expiry for original census tracts. A frequently asked question on the same page asks about a map said not to expire until December 31, 2025, but its answer gives December 31, 2028, the same date as the timeline.

The sources also describe the long-term gain exclusion in different words. HUD says the exclusion is permanent after 10 years under both programs, and that the new program uses a rolling 30-year elimination period. Cozen describes the sunset for dispositions after December 31, 2047 being replaced by a 30-year rolling timeline.

The IRS page lists Notice 2026-40 as transitional guidance, Notice 2026-55 as a request for comments, and proposed regulations REG-116506-25 on information reporting and certification. The page was last reviewed September 24, 2026. The IRS page gives only the titles of these items and does not state the rates.

The HUD and Cozen pages are summaries. The statute text used here is the Cornell reproduction, and the figures above should be checked against the enacted law and the IRS notices.

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