First priority: Quantify exposure to the 2026 tax bill
The most immediate issue for investors is understanding the amount of gain that will become taxable at the end of 2026. Taxpayers should model federal and state tax exposure, evaluate anticipated liquidity needs, and identify planning opportunities relating to the valuation of investments.
Deferred gains associated with QOZ 1.0 investments must be recognized by Dec. 31, 2026. Notice 2026-40 confirms that taxpayers cannot simply roll those deferred gains into a new QOZ 2.0 investment and continue the existing deferral.
In some cases, the investor may not have set aside sufficient liquidity to satisfy the upcoming tax obligation. Others may have experienced material changes in state residency, creating additional onsiderations related to state tax conformity.
Finally, note that passthrough entities have a special rule. Generally, the amount recognized into income on an inclusion event is the lesser of FMV or eligible gain deferred, less any basis step-up allowable. Passthroughs must use the lesser of eligible gain deferred or the gain that would be recognized on a fully taxable disposition at fair market value of the qualifying investment that gave rise to the inclusion event.
Second priority: Use partnership timing rules to extend the capital deployment window
Partnership gains deserve special attention because the opportunity zone rules provide partners with additional flexibility in determining when the 180-day investment period begins. If a partnership elects to make a QOZ investment, then the 180 days begin upon recognition of the eligible gain. If a partnership does not make the QOZ investment at the partnership level, a partner generally may elect to start the 180-day period on one of several dates, including the date the partnership recognized the gain, the last day of the partnership's taxable year, or the due date of the partnership's tax return for that year, determined without extensions.
That last date can be very important for calendar-year partnerships. For a 2026 partnership capital gain, a partner may be able to use the partnership return due date, generally March 15, 2027, as the start of the 180-day period. That can effectively extend the QOZ investment deadline into September 2027, creating a practical bridge between capital gains recognized under the QOZ 1.0 regime and investments made after the new QOZ 2.0 framework becomes effective.
This timing rule should be part of the immediate planning conversation for taxpayers expecting material pass-through capital gains in 2026. Partnerships will need to decide whether to invest at the entity level or leave the decision to the partners. Partners, in turn, should coordinate K-1 reporting, liquidity planning and potential QOZ funding well before the extended investment window opens. The rule does not eliminate the 2026 inclusion event for previously deferred QOZ gains, but it may create meaningful flexibility for new eligible gains recognized through partnerships.
Third priority: Revisit valuation and exit strategies
Many QOZ 1.0 investments have matured significantly since 2018 and 2019. For some investors, appreciation may support continuing to hold the investment to preserve long-term benefits. For others, current valuations may reveal opportunities to restructure, refinance or otherwise reposition investments before key transition dates.
Valuation considerations have become increasingly important as investors prepare for reporting obligations, assessing future liquidity needs, and evaluating the economics of maintaining existing structures. QOZ 1.0 implementation emphasized the need for early valuation planning and documentation, particularly where discounts, fair market value determinations, and investor reporting are involved.
Waiting until late 2026 or 2027 to address valuation issues may significantly limit available planning alternatives.
Fourth priority: Protect the benefits of existing QOZ investments
Although deferred gains become taxable in 2026, many valuable benefits associated with QOZ 1.0 investments remain in place. The exclusion of gain on the investment if held for at least 10 years can be a valuable incentive in the right investment. Existing investments may continue to benefit from the long-term appreciation exclusion rules and certain compliance safe harbors. Notice 2026-40 provides important transition relief for many existing projects and clarifies how legacy investments can continue to operate after the introduction of the new regime.
Investors often focus exclusively on the 2026 tax bill while overlooking the value associated with preserving post-2026 benefits. A comprehensive review of fund compliance, operational requirements, and future capital plans should occur well before the transition occurs.
Fifth priority: Identify QOZ 2.0 opportunities now
The best QOZ 2.0 opportunities may be identified before the first designation becomes effective.
States are currently in the process of identifying and nominating census tracts for the first round of new opportunity zones. Because Congress narrowed eligibility requirements and eliminated certain features of the original program, the geography of investment opportunities is likely to change significantly beginning in 2027. We expect to see feweropportunity zones overall, while some opportunity zones will no longer qualify for new investments in 2027.
Developers, real estate investors, fund sponsors and operating businesses should already be reviewing acquisition pipelines, evaluating development opportunities and identifying projects that could benefit from future designation. Taxpayers that begin this process early will be better positioned to move quickly once new zones are finalized.
Sixth priority: Prepare for a significantly expanded compliance environment
One of the most consequential changes under QOZ 2.0 is a dramatically increased focus on reporting and compliance.
Congress and the IRS have signaled a desire for greater transparency regarding opportunity zone investments. New reporting requirements, enhanced disclosure obligations and potentially significant penalties will require many taxpayers to reevaluate existing processes and documentation procedures. Internal planning discussions have similarly focused on compliance risk, information return requirements, documentation standards and implementation of consistent reporting practices.
Fund sponsors that use the next 18 months to strengthen controls and reporting systems will be better positioned than those that wait until new filing requirements are fully effective.
