By Harry Prabandham · Updated September 28, 2026
Investing & Markets
Qualified Opportunity Zone Funds: Deferral, the 10-Year Exclusion, and 2027 Changes
QOZ funds let investors defer capital gains and exclude later appreciation after 10 years. The 2025 tax law made the program permanent from 2027.
Qualified Opportunity Zone Funds: Deferral, the 10-Year Exclusion, and 2027 Changes
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What is a Qualified Opportunity Zone fund?
- A Qualified Opportunity Fund (QOF) is a partnership or corporation that holds at least 90% of its assets in property located in designated opportunity zones.
- Investing an eligible capital gain in a QOF, generally within 180 days, lets you defer tax on that gain.
- Holding the QOF investment at least 10 years can let you exclude its appreciation from federal tax.
- The program was created in 2017; the July 2025 tax law made it permanent with new rules for investments made after December 31, 2026.
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What is a Qualified Opportunity Zone fund?
- A Qualified Opportunity Fund (QOF) is a partnership or corporation that holds at least 90% of its assets in property located in designated opportunity zones.
- Investing an eligible capital gain in a QOF, generally within 180 days, lets you defer tax on that gain.
- Holding the QOF investment at least 10 years can let you exclude its appreciation from federal tax.
- The program was created in 2017; the July 2025 tax law made it permanent with new rules for investments made after December 31, 2026.
What happens to gains deferred under the original program?
- For investments made through 2026, the deferred gain is recognized on the earlier of selling the QOF interest or December 31, 2026.
- That means tax on those deferred gains is generally due with 2026 returns filed in 2027, so cash to pay it needs planning.
- The original 10% and 15% basis increases required holding periods that can no longer be met for new investments before the 2026 deadline.
- The 10-year exclusion on the QOF investment's appreciation still applies to qualifying investments made under the original rules.
How do the rules change for investments after 2026?
- Deferral becomes rolling: gain is recognized on the earlier of selling the QOF interest or five years after the investment.
- Holding at least five years increases basis by 10% of the deferred gain, or 30% for a qualified rural opportunity fund.
- The 10-year exclusion continues, but appreciation after 30 years is no longer excluded.
- New zones are designated in 10-year rounds, with the first new designations effective January 1, 2027 and original zones expiring after 2028.
What kinds of investments do QOFs make?
- Many QOFs develop or substantially improve real estate in opportunity zones.
- Buying an existing building generally requires improvements exceeding the building's purchase basis within 30 months to qualify.
- Operating businesses in a zone can qualify if they meet asset, income, and activity tests.
- Funds range from single projects to diversified vehicles, with very different risk profiles.
What are the main risks?
- QOF interests are generally illiquid, and the 10-year exclusion requires staying invested for at least a decade.
- A tax benefit does not make a weak project a sound investment; deal economics still drive results.
- Fees, leverage, and concentration in a single project or market can magnify losses.
- If a fund fails the 90% asset test it can owe penalties, investors can lose expected benefits, and investors must file Form 8997 each year.
Key takeaways
- QOFs offer gain deferral and, after 10 years, exclusion of the QOF investment's appreciation.
- Gains deferred under the original program are generally recognized at the end of 2026.
- From 2027, deferral lasts up to five years, with a 10% basis increase (30% for rural funds) and a 30-year cap on the exclusion.
- Eligibility and timing rules are technical, so confirm them with a CPA or tax attorney before investing.
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