What is an opportunity zone?
An opportunity zone is a census tract that a state nominated and the Treasury certified under section 1400Z-1 of the tax code. The Tax Cuts and Jobs Act of 2017 created the program to direct private investment into low-income communities.
The first round of zones was designated in 2018. Under section 1400Z-1, a designation lasts through the end of the tenth calendar year after it starts, so the original zones run through December 31, 2028. Public Law 119-21, the 2025 tax law, made the program permanent and created a new round of zones every ten years.
Under the new rules, a tract generally qualifies if its median family income is no more than 70% of the state or metro median, or if its poverty rate is at least 20% and its median family income is no more than 125% of that benchmark. A state can designate no more than 25% of its low-income tracts in each round.
What is a Qualified Opportunity Fund?
A Qualified Opportunity Fund, or QOF, is a corporation or partnership organized to invest in opportunity zone property that holds at least 90% of its assets in that property. The test is run twice a year, and a fund that misses it owes a monthly penalty unless it shows reasonable cause.
Funds self-certify with the IRS on Form 8996. You invest your gain as equity in the fund, not as a loan, and you file Form 8997 each year you hold the investment.
The 2025 law added reporting. Under section 6039K, funds file annual returns with details on their assets, census tracts, residential units and investor dispositions, starting with tax years beginning after July 4, 2025. Under section 6726, a late or incomplete return costs $500 a day, capped at $10,000, or $50,000 for funds with more than $10 million of gross assets, with higher amounts for intentional disregard.
The 180-day rule: when you have to invest your gain
You generally have 180 days from the date you realize a capital gain or qualified section 1231 gain to invest that amount in a Qualified Opportunity Fund. You make the deferral election on Form 8949 with the return for the year the gain would otherwise be taxed, and the gain can’t come from a sale to a related person.
Only the gain needs to go in, not the whole sale price. Say you sell a building for $3 million with a $900,000 gain: investing $900,000 defers all of it. Any extra cash you put in is treated as a separate investment with no deferral and no 10-year benefit.
The regulations set different start dates for some gains, like gains passed through from a partnership on a Schedule K-1, so have your CPA confirm your window so you don’t miss it.
The December 31, 2026 deadline for gains deferred under the original rules
If you invested a deferred gain in a QOF under the original rules, that gain is taxed in the tax year that includes December 31, 2026, unless you sold the investment or had another inclusion event earlier. For most individuals this means the tax shows up on the 2026 return filed in 2027, even though you haven’t sold anything.
The amount you include is the lesser of the gain you deferred or the investment’s fair market value on that date, minus your basis. The 10% basis increase for a five-year hold only helps if you invested by December 31, 2021, and the extra 5% for a seven-year hold only helps if you invested by December 31, 2019.
Plan the cash now, because a QOF interest usually can’t be sold to pay the bill. The good news is that the 10-year benefit survives: once the gain is included, your basis rises by that amount, and holding at least 10 years still lets you elect to exclude the fund’s appreciation.
What changed under Public Law 119-21 (the 2025 tax law)
Public Law 119-21, signed July 4, 2025, made opportunity zones permanent and rebuilt the benefits for amounts invested after December 31, 2026. Under Notice 2026-40, a gain realized in 2026 can still be deferred by investing on or after January 1, 2027 within its 180-day window, under the new rules.
- New zones every ten years: states nominate tracts starting each July 1 of a decennial year, beginning July 1, 2026. Zones certified in 2026 run from January 1, 2027 through December 31, 2036.
- Rolling five-year deferral: instead of a fixed end date, deferred gain is taxed at the earlier of selling the investment or five years after you invested.
- Basis increase: holding five years raises basis by 10% of the deferred gain, or 30% for a qualified rural opportunity fund. The seven-year 5% bonus is gone.
- Rural funds: a fund holding at least 90% of its assets in zones made up entirely of rural areas (outside cities or towns over 50,000 people and their adjacent urbanized areas).
- 10-year exclusion with a 30-year cap: after 10 years you can elect fair market value basis when you sell, but if you hold past 30 years, basis is frozen at fair market value on the 30th anniversary.
- Lower rural improvement bar: for buildings in fully rural zones, the substantial improvement threshold is 50% of adjusted basis instead of 100%.
- Old zones after 2026: under Notice 2026-40, property bought after December 31, 2026 generally qualifies only in zones designated after July 4, 2025, with exceptions for working capital plans adopted by December 31, 2026 and ordinary replacements.
The substantial improvement test for existing buildings
A QOF that buys an existing building must either be its first use in the zone or substantially improve it, which means adding more than the building’s adjusted basis within any 30-month period after acquisition. In plain terms, you roughly double your investment in the building.
Land doesn’t count. The regulations measure improvement by additions to the basis of the building, and the land under it doesn’t have to be improved. If a fund buys a $6 million property with $1.5 million allocated to land, it has 30 months to spend more than $4.5 million on the $4.5 million building. In a fully rural zone, the bar is more than $2.25 million.
How this works for a 5+ unit apartment building
Multifamily fits opportunity zones well because residential rental property can be qualified business property, and apartment buildings are long holds anyway. The two common paths are ground-up development, which is original use from day one, and a heavy rehab of an existing building that clears the substantial improvement test.
Light value-add usually doesn’t work. New interiors and a fresh roof on a $4 million building rarely add another $4 million of basis in 30 months. Ground-up projects carry construction and lease-up risk, so the deal has to pencil on cap rate, NOI and DSCR without the tax break.
Timing matters after 2026. A fund buying property after December 31, 2026 generally needs it to be in a newly designated zone, so check the new map before underwriting an old-zone site.
Worked example: old rules vs new rules
Take a $500,000 long-term capital gain invested in a QOF within 180 days, taxed at today’s top federal rates of 20% plus the 3.8% net investment income tax, or 23.8%. The fund investment later grows to $900,000.
Under the original rules, money invested in 2025 gets no basis increase because it can’t reach five years by December 31, 2026. The full $500,000 is taxed on the 2026 return: $119,000. If held 10 years and sold for $900,000, the $400,000 of growth can be excluded, saving $95,200.
Under the new rules, money invested on June 1, 2027 is taxed in the year that includes June 1, 2032. In a standard QOF, the 10% increase cuts the taxable gain to $450,000, for $107,100 of tax, saving $11,900. In a rural QOF, the 30% increase cuts it to $350,000, for $83,300 of tax, saving $35,700. A sale after June 1, 2037 can still exclude the $400,000 of growth.
| Item | Original rules (invested 2025) | New rules, standard QOF | New rules, rural QOF |
|---|---|---|---|
| Deferred gain | $500,000 | $500,000 | $500,000 |
| Tax date | Tax year including Dec. 31, 2026 | Tax year including June 1, 2032 | Tax year including June 1, 2032 |
| Basis increase | $0 | $50,000 (10%) | $150,000 (30%) |
| Gain taxed | $500,000 | $450,000 | $350,000 |
| Tax at 23.8% | $119,000 | $107,100 | $83,300 |
| Tax on $400,000 growth after 10 years | $0 with election | $0 with election | $0 with election |
Opportunity zone vs 1031 exchange
A 1031 exchange defers all the gain on investment real estate as long as you keep rolling into like-kind property. An opportunity zone investment defers only for a while, but it can wipe out the tax on the new investment’s growth.
| Factor | Opportunity zone fund | 1031 exchange |
|---|---|---|
| Eligible gains | Capital gains and qualified 1231 gains from any asset | Gain on real property held for investment or business use |
| What you reinvest | Only the gain | All net proceeds, replacing any debt paid off, for full deferral |
| Deadlines | 180 days to invest | 45 days to identify, 180 days to close |
| Replacement | Equity in a QOF | Like-kind real property |
| How long tax is deferred | Five years under the new rules | Until you sell without exchanging |
| Tax on new growth | Can be excluded after 10 years | Deferred, not excluded |
| Typical structure | Passive equity in a fund or syndication | Direct ownership, a TIC interest or a DST |
| Control | Usually none; the sponsor runs the project | Full control if you buy directly |
Risks of opportunity zone investing
The biggest risk is buying a weak deal for a tax break. A project that loses money in a struggling tract can cost you far more than the tax you saved.
- Illiquidity: the full benefit needs a 10-year hold, and QOF interests rarely have a resale market.
- Phantom tax: deferred gain comes due on a fixed date whether or not the fund has paid you anything.
- Execution: construction overruns or missing the 30-month improvement window can disqualify property.
- Compliance: a fund that fails the 90% asset test owes penalties, and new reporting adds cost.
- Location: new zones are chosen for low incomes, so rent growth and exit cap rates are uncertain.
How to find opportunity zone maps
The CDFI Fund, part of the Treasury, publishes the official list, shapefile and an online mapping tool for designated opportunity zones. Its current list covers the original 2018 zones.
- Go to the CDFI Fund’s Opportunity Zones Resources page and open the mapping tool or the designated tracts list.
- Look up the property’s census tract number from its address.
- For deals after 2026, check the new zones: Treasury opened the nomination cycle on July 1, 2026, and new zones take effect January 1, 2027. Your governor’s office nominates the tracts.
Investing with Skyline Capital Investments
Skyline Capital Investments buys and operates apartment buildings with 5 or more units and works with passive investors through its Investor Network. Skyline does not currently sponsor a Qualified Opportunity Fund. Investors weighing opportunity zones often look at multifamily syndications and 1031 exchanges too.
To hear about future multifamily offerings, join the Investor Network using the form on this page. Offerings are made only to eligible investors through offering documents, and most are limited to accredited investors.
