Core Tax Benefits (Under the Original OZ 1.0 Rules, Applicable Through 2026)

Opportunity Zones (OZs) are a federal tax incentive program created under the 2017 Tax Cuts and Jobs Act to encourage private investment in economically distressed, low-income communities (designated census tracts across the U.S.). Investors can channel capital gains into these areas via Qualified Opportunity Funds (QOFs), which must invest primarily in qualified Opportunity Zone property (such as real estate or businesses in the zones).

The program aims to spur economic development, job creation, and revitalization in underserved areas while offering significant tax advantages to investors. Note that as of early 2026 (current date: February 2026), the original program (often called OZ 1.0) is in its final phase, with key changes from the 2025 One Big Beautiful Bill Act (OBBBA) making it permanent under updated rules (OZ 2.0 starting in 2027).Core Tax Benefits (Under the Original OZ 1.0 Rules, Applicable Through 2026)Investors who realize capital gains (e.g., from stocks, real estate, or business sales) can reinvest those gains into a QOF within 180 days to qualify for these benefits. The incentives scale with holding period:

1. Temporary Deferral of Capital Gains Tax
   Taxes on the reinvested capital gains are deferred until the earlier of:
   • An "inclusion event" (e.g., selling the QOF investment), or
   • December 31, 2026 (this is the key upcoming deadline—deferred gains become taxable by end of 2026 regardless of holding period).
2. Step-Up in Basis (Reduction of Deferred Tax)
   • Hold the QOF investment for at least 5 years → 10% of the deferred gain is permanently excluded (basis increases by 10%).
   • Hold for at least 7 years → Additional step-up to 15% exclusion of the deferred gain.
     (Note: To maximize this, investments needed to be made by roughly 2019–2020 for full 7-year benefit before the 2026 deadline.)
3. Permanent Exclusion of Future Appreciation
   The most powerful benefit: If you hold the QOF investment for at least 10 years, any new capital gains generated from the appreciation of the OZ investment are permanently excluded from federal capital gains tax (i.e., tax-free on the growth). This can apply even after 2026 for qualifying long-term holdings.

These benefits apply only to federal taxes (state rules vary), and investments must meet strict QOF rules (e.g., 90% of assets in qualified OZ property).Current Status in 2026 and Transition to OZ 2.0

• 2026 is transitional: Current OZ designations remain valid through the end of 2026 (some sources note extensions to 2028 in overlap). This is the last year to invest under original deferral rules, and deferred gains are recognized by Dec. 31, 2026.
• Permanent extension via 2025 legislation: The program is now permanent, with OZ 2.0 rules starting January 1, 2027:
  • New zone designations every 10 years (nominations begin July 2026).
  • Rolling 5-year deferral for new investments (instead of fixed 2026 deadline).
  • Enhanced incentives for rural areas (e.g., higher basis step-ups like 30% in some cases, reduced substantial improvement thresholds from 100% to 50% for rural properties).
  • Tighter eligibility for zones and more focus on operating businesses/rural investments.
  • Overlap period (2027–2028) where both old and new maps may apply in some contexts.

Why It Matters for Properties Like the One in TopekaProperties in designated Opportunity Zones (like 320 W 1st Avenue in Topeka, KS) can attract investors seeking these tax breaks, potentially increasing demand, values, or development potential—especially if the investment qualifies under QOF rules.For personalized advice, consult a tax professional or financial advisor, as rules are complex and depend on individual circumstances. The IRS website (irs.gov/opportunity-zones) has the latest guidance. If you'd like details on how this applies to a specific investment or current rural enhancements, let me know!

--

Henry McClure 

Time kills deals

785-383-9994

www.henrymcclure.live