Qualified Opportunity Zone Tax Incentive
IRS / U.S. Department of Treasury
No cap — gain-size dependent
Invest gains in OZs — pay zero tax on appreciation
Federal capital gains tax incentive for investors who place eligible gains into a Qualified Opportunity Fund (QOF) investing in designated low-income census tracts. Offers temporary deferral of the original gain and permanent exclusion of appreciation on the QOF investment held 10+ years. OZ 1.0 tracts (8,764 census tracts) are in effect through 2028; OZ 2.0 designations begin 2027 and extend through 2036.
- Funding type
- Tax Credit
- Level
- Federal
- Amount
- No dollar cap. Benefit is a tax deferral plus exclusion of appreciation proportional to invested gain. Investors typically deploy $500K–$50M+.
- Realistic amount
- Tax savings proportional to gain size; a $1M gain invested 10+ years may eliminate $200K–$400K in federal tax on QOF app…
- Deadline
- Rolling — OZ 1.0 tracts active through Dec 31, 2028; OZ 2.0 designations begin 2027, active through 2036. Capital gain must be invested in QOF within 180 days of realization.
- Status
- active
- States
- Nationwide
- Payment model
- tax offset
Who qualifies
- Must have an eligible capital gain (from sale of stock, real property, business interest, or other capital asset)
- Gain must be reinvested into a Qualified Opportunity Fund (QOF) within 180 days of the sale
- The QOF must hold ≥90% of assets in Qualified Opportunity Zone Property (QOZP) — either business equity or tangible property
- For tangible property: must be original use in the OZ OR substantially improved (100% of adjusted basis doubled)
- For OZ business equity: ≥50% of gross income from active conduct in OZ, ≥40% of tangible property in OZ, <5% of property is nonqualified financial property
- Investor self-certifies QOF status annually on Form 8996; no prior IRS approval required
- Qualifying zones confirmed via IRS OZ census tract map (OZ 1.0 through 2028; OZ 2.0 from 2027)
Hard requirements
- Requires a qualifying capital gain
- Must be in a Qualified Opportunity Zone
What it covers
Eligible expenses
- Equity investment in QOF purchasing OZ real property (commercial, industrial, mixed-use)
- QOF investment in OZ business equity (operating businesses, startups, manufacturing)
- QOF purchase of new or substantially improved tangible business property located in OZ
- Working capital in OZ businesses under a written plan (31-month safe harbor)
- Construction and substantial improvement of OZ real property
Ineligible expenses
- Residential rental property with ≤5 rental units
- Golf courses, country clubs, massage parlors, hot tub facilities, suntan facilities, racetracks, gambling establishments, liquor stores
- OZ businesses where ≥5% of property is 'sin business' category
- Investment vehicles that don't meet ≥90% QOF asset test
- Ordinary income (W-2 wages, ordinary business income) — only capital gains qualify for deferral
- Gains reinvested more than 180 days after the triggering event
How to apply
-
1
Identify eligible gain
Confirm you have a qualifying capital gain from a recent asset sale (stock, real estate, business interest). Gain must be capital in nature — ordinary income does not qualify.
~2 hrs
-
2
Find or form a QOF
Either invest through an existing QOF (many sponsors publish offerings) or self-certify your own entity as a QOF by filing Form 8996 with your tax return. Most investors use a sponsor-run QOF.
~10 hrs
-
3
Verify OZ location
Confirm the target property or business is in a designated OZ census tract using the IRS/HUD mapping tool. OZ 1.0 tracts are fixed through 2028; new OZ 2.0 tracts will be designated 2027.
~2 hrs
-
4
Invest within 180-day window
Wire capital into the QOF within 180 days of the gain-triggering event. Document the investment date carefully — this starts the holding period clock.
~3 hrs
-
5
File Form 8949 and Form 8997 annually
Report the deferred gain on Form 8997 (Initial and Annual Statement of QOF Investments) filed with your federal return each year the investment is held. Track original gain amount, deferral date, and QOF investment value.
~3 hrs
-
6
Hold 10 years for full exclusion
At 10-year mark, elect step-up in basis to fair market value on Form 8949. QOF appreciation is permanently excluded from federal capital gains tax at disposition. State taxes vary — check state OZ conformity.
~2 hrs
State tax conformity is the hidden variable — 11 states (including CA) don't conform to OZ deferrals, so investors owe state tax on the deferred gain in year of investment.
Deadline & timing
Investors must reinvest eligible capital gains into a QOF within 180 days of the triggering sale. Gains from partnerships have an extended window (to Dec 31 of the year following the partnership's tax year). The 10-year hold clock starts at QOF investment date, not property purchase date.
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Last reviewed 2026. GrantCompass is an independent funding-discovery tool and is not affiliated with any government agency. Always confirm details on the official program page.