News & Insights

By CGS3 Partner and Chair of the Tax Practice Group, Phil Jelsma

SAN DIEGO (July 16, 2026) – Outlining the next steps for Opportunity Zone investments, the Internal Revenue Service (IRS) recently issued Notice 2026-40 (“The Notice”) – providing long-awaited interim guidance for investors and sponsors of Qualified Opportunity Zone funds (“QOFs”) and Qualified Opportunity Zone Businesses (“QOZBs”).  The Notice previews forthcoming treasury regulations implementing the OBBA amendments – often referred to a “OZ 2.0” – with a focus on how existing deals will fit into the new framework. Notice 2026-40 previews new regulations which will provide transitional rules as we move from the existing Opportunity Zone rules to OZ 2.0. 

Among its key provisions:

• The Notice clarifies the treatment of deferred gains scheduled for recognition on December 31, 2026. Taxpayers with existing Opportunity Zone investments generally must recognize any remaining deferred gain at that time and may not re-defer it under the new Opportunity Zone provisions. However, investors may continue to benefit from the program’s long-term appreciation exclusion if applicable holding-period requirements are met.
• The Notice establishes transitional rules for Qualified Opportunity Zone Businesses (QOZBs) acquiring Opportunity Zone property after December 31, 2026. To qualify, a QOZB must: (1) adopt a written working capital plan by December 31, 2026; (2) acquire property substantially consistent with that plan; (3) receive at least 10% of the plan’s estimated working capital by December 31, 2026; and (4) expend at least 5% of those working capital assets by that date.
• The Notice provides that tangible property acquired after December 31, 2026 in the ordinary course of business to replace or modernize existing property in a previously designated Opportunity Zone may still qualify for Opportunity Zone treatment under certain circumstances, providing flexibility for businesses making capital improvements.
• The Notice also addresses the long-term basis adjustment for investments made after December 31, 2026, confirming a new 30-year cap on the fair market value basis step-up. Qualifying investments held longer than 30 years will receive a basis adjustment only to their fair market value on the investment’s 30th anniversary, limiting any additional tax-free appreciation thereafter.

Notice 2026-40 provides critical guidance during a period of significant transition. While proposed regulations are forthcoming, the notice offers valuable certainty on key operational and tax issues and should be carefully reviewed as investors prepare for the Opportunity Zone program’s next phase.

CGS3 partner Phil Jelsma, chair of our tax practice group, recently examined this interim guidance in an article published in The Los Angeles Daily Journal and The Daily Transcript (subscriber only).

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