Glossary

An Opportunity Zone, or Qualified Opportunity Zone (QOZ), is a designated low-income census tract where investors can reinvest capital gains through a Qualified Opportunity Fund (QOF) in exchange for federal tax incentives. The program was created in 2017 to channel private capital into underserved communities. The Working Families Tax Cuts legislation, signed into law in July 2025, made it permanent and set it on a rolling 10-year cycle, with a new zone map every decade.

Key Features

• Deferral: For QOF investments made on or after January 1, 2027, the tax on the original gain is deferred for five years from the date of the investment, or until the investment is sold, if that comes first. Only the gain needs to be reinvested, generally within 180 days.
• Basis step-up: Investors who hold for the full five years receive a 10% basis step-up, or 30% for a Qualified Rural Opportunity Fund (QROF).
• Tax-free appreciation: If a QOF investment is held 10 years or more, the investor can generally elect to step up its basis to fair market value when it is sold, so the appreciation is not taxed. That step-up is capped at the investment’s value on its 30-year anniversary.
• Any gain source: Unlike a 1031 exchange, the gain does not need to come from a like-kind asset. It can come from selling a business, stock, or another appreciated asset.
• Improvement requirement: For existing buildings, the required improvement is generally equal to the building’s original basis, or generally half of it in rural Opportunity Zones.
• Earlier investments: Investments made before 2027 continue under the original program’s rules.

Where Opportunity Zones Are Located

The original 2018 map designated 8,764 Qualified Opportunity Zones (QOZs) across all 50 states, the District of Columbia, and five U.S. territories. Under the permanent program, a new map takes effect January 1, 2027, and runs through December 31, 2036. States could nominate a smaller share of their eligible tracts this time, so the total is expected to shrink to roughly 6,300 to 6,500 zones. Existing zone designations generally remain in effect through December 31, 2028.

Example

Hypothetical example, for illustration only: An investor sells a business in March 2027 with a $500,000 capital gain and invests that gain in a standard QOF within 180 days. Tax on the gain is deferred for five years. At the five-year mark, the investor’s basis increases by 10%, so $450,000 of the original gain is taxed rather than $500,000. If the investor holds the QOF investment for at least 10 years, any appreciation on it can be excluded from tax when sold. This example does not reflect any actual investment, return, or tax rate.

Considerations

Opportunity Zone investments are alternative investments. They can be complex and illiquid and carry real risk, including the potential loss of principal, and they often involve development in areas that have historically attracted less investment. Because holding periods are investment-specific, investors should review their exact situation with a tax advisor.

For a full walkthrough, read our full guide to the 2.0 rules, or see how SREI Group approaches these investments.