n-26-40.pdf

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Part III - Administrative, Procedural, and Miscellaneous

Transitional Guidance on Qualified Opportunity Zones under §§ 1400Z-1 and 1400Z-2

Notice 2026-40

SECTION 1. PURPOSE
This notice announces that the Department of the Treasury (Treasury Department)
and the Internal Revenue Service (IRS) intend to issue proposed regulations regarding
qualified opportunity zones (QOZs) under §§ 1400Z-1 and 1400Z-2 of the Internal
Revenue Code (Code)
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, as amended by § 70421 of Public Law 119-21, 139 Stat. 72
(July 4, 2025), commonly known as the One, Big, Beautiful Bill Act (OBBBA), including
transitional guidance related to qualifying investments under §§ 1400Z-1 and 1400Z-2,
as in effect prior to amendment by § 70421 of the OBBBA (forthcoming proposed
regulations). The forthcoming proposed regulations are anticipated to include proposed
rules similar to the rules provided in sections 3 through 5 of this notice.
SECTION 2. BACKGROUND
.01 Sections 1400Z-1 and 1400Z-2
(1) Section 1400Z-1. Section 1400Z-1 provides the procedural rules for the
designation of QOZs, the related definitions, and the applicable period for which such

1
Unless otherwise specified, all “section” or “§” references are to sections of the Code or the Income Tax
Regulations (26 CFR part 1).

2

designations remain in effect.
(2) Section 1400Z-2. Section 1400Z-2 allows the deferral of inclusion in gross
income for certain realized gains to the extent that corresponding amounts are timely
invested in a corporation or partnership that meets the requirements to be certified as a
qualified opportunity fund (QOF), as defined in § 1400Z-2(d)(1) and § 1.1400Z2(d)-1. If
certain qualifications and holding period requirements are met, then (i) a portion of such
deferred gains may be excluded from gross income, and (ii) gain on the taxpayer’s
investment of such amounts in a QOF may be excludable from gross income.
.02 References to §§ 1400Z-1 and 1400Z-2. All references hereinafter in this notice
to “prior § 1400Z-1” and “prior § 1400Z-2” refer to §§ 1400Z-1 and 1400Z-2, as in effect
after amendment of the Code by both § 13823 of Public Law 115-97, 131 Stat. 2054,
2183 (December 22, 2017), commonly known as the Tax Cuts and Jobs Act (TCJA),
and by § 41115 of the Bipartisan Budget Act of 2018 (BBA 2018), Public Law 115-123,
132 Stat. 64, 161 (February 9, 2018), but prior to amendment by § 70421 of the
OBBBA. All references in this notice to “§ 1400Z-1” and “§ 1400Z-2” refer to §§ 1400Z-
1 and 1400Z-2 as amended by § 70421 of the OBBBA.
.03 Definitions
(1) Qualified Opportunity Zones. For purposes of §§ 1400Z-1 and 1400Z-2,
§ 1400Z-1(a) defines a QOZ as any population census tract that is a low-income
community (LIC), as defined in § 1400Z-1(c)(1), that is designated as a QOZ. This
notice refers to a QOZ designated under prior § 1400Z-1 as a “previously designated
QOZ.”
(2) Qualified Opportunity Fund. Section 1400Z-2(d)(1) provides that a QOF is an

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investment vehicle that is organized as a corporation or a partnership for the purpose of
investing in qualified opportunity zone property (QOZP), other than another QOF, that
holds at least 90 percent of its assets in QOZP as measured on the dates described in
§ 1400Z-2(d)(1)(A) and (B) (90-percent investment standard). See § 1.1400Z2(a)-
1(b)(4).
(3) Qualified opportunity zone property. Section 1400Z-2(d)(2)(A) defines QOZP
as property that is qualified opportunity zone stock (QOZ stock), qualified opportunity
zone partnership interest (QOZ partnership interest), or qualified opportunity zone
business property (QOZBP).
(a) Qualified opportunity zone stock. Effective for stock acquired on or before
December 31, 2026, prior § 1400Z-2(d)(2)(B) and the regulations thereunder define
QOZ stock as any stock in a domestic corporation if: (i) the stock was acquired by a
QOF at its original issue from the corporation solely in exchange for cash after
December 31, 2017; (ii) the corporation was a qualified opportunity zone business
(QOZB) (or newly organized for such purpose) at the time the stock was issued; and
(iii) for 90 percent of the QOF’s holding period of such stock, the corporation qualified as
a QOZB. See prior §§ 1400Z-2(d)(2)(B) and 1.1400Z2(d)-1(c)(2)(i). Effective for stock
acquired after December 31, 2026, § 70421(c)(4)(B) of the OBBBA modified § 1400Z-
2(d)(2)(B)(i)(I) by replacing “December 31, 2017,” with “applicable date,” which, as
defined in § 1400Z-2(d)(2)(E), means, with respect to any corporation that is a QOZB,
the earliest applicable start date with respect to the QOZBP held by such QOZB. See
paragraph (5) of this subsection for the definition of “applicable start date.”
(b) Qualified opportunity zone partnership interest. Effective for partnership

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interests acquired on or before December 31, 2026, prior § 1400Z-2(d)(2)(C) and the
regulations thereunder define QOZ partnership interest as any capital or profits interest
in a domestic partnership where: (i) the interest was acquired by a QOF from the
partnership solely in exchange for cash after December 31, 2017; (ii) the partnership
was a QOZB (or newly formed for such purpose) at the time the interest was acquired;
and (iii) for 90 percent of the QOF’s holding period of such interest, the partnership
qualified as a QOZB. See prior § 1400Z-2(d)(2)(C) and § 1.1400Z2(d)-1(c)(3)(i).
Effective for partnership interests acquired after December 31, 2026, § 70421(c)(4)(B)
of the OBBBA modified § 1400Z-2(d)(2)(C)(i) by replacing “December 31, 2017,” with
“applicable date” as defined in § 1400Z-2(d)(2)(E). Under § 1400Z-2(d)(2)(E),
“applicable date” means, with respect to any partnership that is a QOZB, the earliest
applicable start date with respect to the QOZBP held by such QOZB.
(c) Qualified opportunity zone business property. Effective for property acquired
on or before December 31, 2026, prior § 1400Z-2(d)(2)(D) defines QOZBP as tangible
property used in a trade or business of the QOF if (i) such property was acquired by the
QOF by purchase after December 31, 2017, (ii) the original use of such property in the
QOZ commences with the QOF or the QOF substantially improves the property, and (iii)
during substantially all of the QOF’s holding period for such property, substantially all of
the use of such property was in a QOZ. Effective for property acquired after December
31, 2026, § 70421(c)(4)(A) of the OBBBA amended prior § 1400Z-2(d)(2)(D)(i)(I) by
striking “December 31, 2017” at the end of the subclause and inserting “the applicable
start date (as defined in § 1400Z-1(e)(2)) with respect to the [QOZ] described in”
§ 1400Z-2(d)(2)(D)(i)(III).

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(4) Qualified opportunity zone business.
(a) In general. Section 1400Z-2(d)(3)(A) defines a QOZB as a trade or business
in which substantially all of the tangible property owned or leased in connection with the
trade or business is QOZBP. The trade or business must also satisfy the following
requirements provided in § 1397C(b)(2), (4), and (8): (i) at least 50 percent of the total
gross income of the entity must be derived from the active conduct of a trade or
business in the QOZ; (ii) a substantial portion of the intangible property of such entity
must be used in the active conduct of a trade or business in the QOZ; and (iii) less than
five percent of the average of the aggregate unadjusted bases of the entity’s property
must be attributable to nonqualified financial property. Finally, a QOZB may not be a
trade or business described in § 144(c)(6)(B). See also § 1.1400Z2(d)-1(d)(3).
(b) 70-percent tangible property standard. Section 1.1400Z2(d)-1(d)(1)(i) and
(d)(2) clarify the “substantially all” requirement provided in § 1400Z-2(d)(3)(A)(i)
regarding the amount of tangible property owned or leased by the taxpayer that is
required to be QOZBP. Under the regulations, for an entity’s trade or business to
satisfy the “substantially all” requirement, at least 70 percent (by value) of the tangible
property owned or leased by the trade or business must be QOZBP.
(5) Applicable start date and effective period. Section 70421(b)(2) of the OBBBA
redesignated prior § 1400Z-1(f) as § 1400Z-1(e), and § 70421(b)(3) of the OBBBA
modified when a QOZ designation period begins and ends for QOZs designated under
§ 1400Z-1. A QOZ designation period under § 1400Z-1(e)(1) begins on the applicable
start date and ends on the day before the date that is 10 years after the applicable start
date. Under § 1400Z-1(e)(2), the term “applicable start date” means, with respect to

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any QOZ designated under § 1400Z-1, the January 1 following the date on which such
QOZ was certified and designated. These provisions are effective only for areas
certified and designated after the enactment of the OBBBA.
.04 Designations of QOZs.
(1) In General. Section 1400Z-1(b)(1) allows the Chief Executive Officer (CEO) of
each State, territory of the United States, and the District of Columbia (State) to
nominate LICs within their jurisdiction to be certified and designated by the Secretary of
the Treasury or Secretary’s delegate (Secretary) as QOZs. As described in section
3.01(1) of this notice, § 1400Z-1(d) limits the number of population census tracts in a
State that the Secretary may designate as QOZs with respect to any designation period.
See Rev. Proc. 2026-14, 2026-20 IRB 910, for guidance for State CEOs regarding
nomination of a population census tract for designation as a QOZ effective on January
1, 2027.
(2) Designations of previously designated QOZs.
(a) In general. Under prior § 1400Z-1(c)(1), a population census tract was
eligible for designation as a QOZ if it satisfied the definition of an LIC in § 45D(e). In
addition, prior § 1400Z-1(e) provided that a population census tract that was not an LIC
could be designated as a QOZ if, among other requirements, the tract was contiguous
with an LIC that was designated as a QOZ. Rev. Proc. 2018-16, 2018-9 I.R.B. 383,
provided guidance on the nomination, certification, and designation process under prior
§ 1400Z-1(b)(1) and (2). After the enactment of the TCJA, § 41115 of BBA 2018
created a special rule for Puerto Rico by adding prior § 1400Z-1(b)(3), under which all
LICs in Puerto Rico were deemed certified and designated as QOZs effective on the

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date of the enactment of the TCJA (that is, December 22, 2017).
(b) Notices 2018-48 and 2019-42. Notice 2018-48, 2018-28 I.R.B. 9, amplified
by Notice 2019-42, 2019-29 I.R.B. 352, provides a list of LICs certified and designated
as QOZs by the Secretary in 2018, as well as LICs in Puerto Rico deemed certified and
designated as QOZs under prior § 1400Z-1(b)(3), effective on December 22, 2017.
Notice 2019-42, 2019-29 I.R.B. 352, added two additional census tracts in Puerto Rico
that were deemed certified and designated as QOZs under prior § 1400Z-1(b)(3)
effective on December 22, 2017.
(c) Period for which designation is in effect. Prior § 1400Z-1(f) provided a 10-
year “QOZ designation period” for which a population census tract, once designated as
a QOZ, would remain designated, beginning on the date of the designation and ending
at the close of the 10th calendar year beginning on or after such date of designation.
Accordingly, the QOZ designation period under prior § 1400Z-1(f) ends on—
(i) December 31, 2027, for QOZs deemed certified and designated in Puerto
Rico under prior § 1400Z-1(b)(3), and
(ii) December 31, 2028, for all other QOZs.
SECTION 3. TRANSITIONAL GUIDANCE REGARDING SECTION 1400Z-1
.01 QOZ designations under the OBBBA.
(1) Application of 25-percent limitation. Prior § 1400Z-1(d)(1) provided that, except
as provided in prior § 1400Z-1(d)(2)
2
and (b)(3) (deemed designation rule for Puerto
Rico), the number of designated QOZs may not exceed 25 percent of the total number

2
Prior § 1400Z-1(d)(2) provided that, notwithstanding the 25-percent limitation, if a State contains fewer
than 100 LICs, then a total of 25 tracts that are LICs may be designated.

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of LIC population census tracts in the State (25-percent limitation). Section 70421(a) of
the OBBBA amended prior § 1400Z-1 to apply the 25-percent limitation on the number
of QOZ designations made during any period. Specifically, § 70421(a)(4) of the OBBBA
amended prior § 1400Z-1(d)(1) to remove the exception from the 25-percent limitation
for Puerto Rico and amended prior § 1400Z-1(d)(1) and (2) to add references to “during
any period.” For purposes of applying the 25-percent limitation on the number of
population census tracts in a State that may be designated as QOZs by the Secretary,
the phrase “during any period” refers to the QOZ designation period under § 1400Z-
1(e)(1) beginning on the applicable start date and ending on the day before the date
that is 10 years after the applicable start date during which an LIC is designated as a
QOZ. Accordingly, the number of previously designated QOZs in a State will not affect
the number of population census tracts that a State CEO may nominate to be
designated as QOZs for the QOZ designation period beginning January 1, 2027.
(2) Applicable start date and designation period. Under § 1400Z-1(e)(2), the term
“applicable start date” means, with respect to any QOZ designated under § 1400Z-1,
the January 1 following the date on which such QOZ was certified and designated.
Therefore, for every LIC certified and designated by the Secretary as a QOZ under
§ 1400Z-1(b) during 2026, the QOZ designation period begins on January 1, 2027, and
ends on December 31, 2036.
SECTION 4. TRANSITIONAL GUIDANCE FOR INVESTORS
.01 Gain realized on or before December 31, 2026, and invested in a QOF on or
before December 31, 2026.
(1) In general. Under § 1400Z-2(a)(1)(A) and § 1.1400Z2(a)-1, in the case of a

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taxpayer with one or more eligible gains, as defined in § 1.1400Z2(a)-1(b)(11), at the
election of the taxpayer, gross income for the taxable year will not include the aggregate
amount of such gain invested by the taxpayer in a QOF during the 180-day period
beginning on the date of the events that gave rise to that gain. Prior § 1400Z-2(b)(1)(B)
and § 1.1400Z2(b)-1(b) provide that if gain was deferred by reason of an election under
§ 1400Z-2(a) for a timely qualifying investment made on or before December 31, 2026,
then such gain must be included in the taxpayer’s gross income in the taxable year that
includes the earlier of (i) the date on which an inclusion event, as defined in
§ 1.1400Z2(b)-1(c), occurs with respect to such qualifying investment (or portion
thereof), or (ii) December 31, 2026.
(2) Inability to make a deferral election for taxpayers holding qualifying investments
through December 31, 2026. Taxpayers holding a qualifying investment (or portion
thereof) through December 31, 2026, are required to include in income in the taxable
year that includes that date the amount of remaining deferred gain from the qualifying
investment as calculated under prior § 1400Z-2(b)(2) and § 1.1400Z2(b)-1(e)(3)
(deemed included gain). Taxpayers that recognize deemed included gain on December
31, 2026, continue to hold a qualifying investment for which an election under § 1400Z-
2(a) remains in effect. See § 1400Z-2(e)(1)(A), §§ 1.1400Z2(a)-1(b)(34) and
1.1400Z2(c)-1(b)(1)(i). Amounts of deemed included gain may not be deferred pursuant
to either prior or current § 1400Z-2(a)(1)(A) because, as noted above, an election
continues to be in effect under prior and current § 1400Z-2(a)(2) with respect to the
eligible gain that gave rise to the deemed included gain on December 31, 2026. Thus,
no amount of deemed included gain can be eligible gain with respect to which an

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election under either prior or current § 1400Z-2(a) may be made.
(3) Continued eligibility to make an election under § 1400Z-2(c). Because the
election under § 1400Z-2(a) with respect to a qualifying investment continues in effect
when an eligible taxpayer recognizes deemed included gain in the taxable year which
includes December 31, 2026, under prior § 1400Z-2(b)(1)(B) and § 1.1400Z2(b)-1(b)(2),
the taxpayer remains potentially eligible to make an election under § 1400Z-2(c) on the
later sale or exchange of that qualifying investment. (The election under § 1400Z-2(c)
can be made only if the taxpayer satisfies the 10-year holding period requirement and
the other requirements of § 1400Z-2 and the regulations thereunder through the date on
which the investment is disposed of. See § 1.1400Z2(c)-1(b)(1)(i).)
.02 Gain realized on or before December 31, 2026, and invested in a QOF on or
after January 1, 2027.
(1) In general. Section 70421(c)(1) of the OBBBA modified prior § 1400Z-2(a)(2)
by allowing a deferral election to be made after December 31, 2026. In addition,
§ 70421(c)(2) of the OBBBA modified prior § 1400Z-2(b) in multiple ways, including by
changing the taxable year of inclusion in prior § 1400Z-2(b)(1)(B) from that which
includes December 31, 2026, to that which includes the date that is 5 years after the
date the qualifying investment was made. Under § 1400Z-2(b)(2)(B), if a qualifying
investment is held for at least five years, a taxpayer’s basis in the qualifying investment
increases by 10 percent (or 30 percent, in the case of any investment in a qualified rural
opportunity fund), as defined in § 1400Z-2(b)(2)(C)). Section 1400Z-2(b)(2)(B) and (C)
are effective for amounts invested in QOFs after December 31, 2026. See
§ 70421(c)(5)(A) of the OBBBA.

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(2) Gain eligible for deferral. In the case of a taxpayer with eligible gain realized
on, before, or after December 31, 2026, who timely invests a corresponding amount in a
QOF on or after January 1, 2027, the taxpayer may elect to defer the recognition of that
gain provided the requirements under § 1400Z-2(a) are met. See § 1.1400Z2(a)-1(b)(7)
for guidance on what is considered a timely investment. The deferred gain with respect
to a qualifying investment made on or after January 1, 2027, must be included in gross
income in the taxable year that includes the earliest of (i) the date on which such
qualifying investment (or portion thereof) is sold or exchanged, (ii) the date on which an
inclusion event other than a sale or exchange occurs with respect to such qualifying
investment (or portion thereof), or (iii) five years from the date the qualifying investment
was made. Section 1400Z-2(b)(2)(B) provides for the determination of basis for
purposes of determining the amount of gain included in gross income.
.03 Eligibility of inclusion event gain.
(1) In general. Under § 1.1400Z2(a)-1(b)(11)(iv)(A), gain with respect to a
qualifying investment (or portion thereof) that is otherwise required to be included in
gross income due to the occurrence of an inclusion event (inclusion event gain) may be
eligible for deferral under § 1400Z-2(a)(1), provided that all of the requirements to elect
to defer eligible gain under § 1400Z-2(a)(1)(A) are met. For purposes of determining
whether inclusion event gain is eligible gain under § 1400Z-2(a)(1)(A), such inclusion
event gain is treated as if it were realized upon the occurrence of the inclusion event
rather than on the sale or exchange that gave rise to the eligible gain to which the
inclusion event relates. See § 1.1400Z2(a)-1(b)(11)(iv).
(2) Requirements to defer inclusion event gain under § 1400Z-2(a). Inclusion

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event gain may be deferred by making a qualifying investment within 180 days of the
inclusion event date. See § 1.1400Z2(a)-1(b)(11)(iv)(B). To the extent a taxpayer has
an inclusion event with respect to any portion of a qualifying investment, that portion is
no longer a qualifying investment and the taxpayer is not eligible to make an election
pursuant to § 1400Z-2(c) with respect to that portion of the qualifying investment. For
guidance on the treatment of the portion of a qualifying investment to which an inclusion
event relates and the inability to make an election under § 1400Z-2(c) with respect to
that portion of the investment, see § 1.1400Z2(c)-1(b)(1)(i).
SECTION 5. TRANSITIONAL GUIDANCE FOR QOFS AND QOZBS
.01 Tangible property acquired after December 31, 2026.
(1) In general. In order for tangible property to meet the “acquired by purchase”
requirement under § 1400Z-2(d)(2)(D)(i)(I), such property must be purchased, as
defined in § 179(d)(2), after the applicable start date, as defined in § 1400Z-1(e)(2), with
respect to the QOZ (that is, January 1 following the date on which such QOZ was
certified and designated as a QOZ). The amendment to the language in prior § 1400Z-
2(d)(2)(D)(i)(I) by § 70421(c)(4)(A) of the OBBBA, from property acquired by purchase
after “December 31, 2017” to property acquired by purchase after the “applicable start
date,” applies to any property acquired after December 31, 2026. See § 70421(c)(5)(B)
of the OBBBA. Thus, § 1400Z-1(e)(2)’s definition of “applicable start date” is effective
only for a QOZ designated after the date of enactment of the OBBBA. See
§ 70421(b)(4) of the OBBBA. A previously designated QOZ does not have an
“applicable start date” under § 1400Z-1(e)(2) because its designation took place before
the date of enactment of OBBBA. Therefore, property acquired by a QOF or QOZB

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after December 31, 2026, cannot be QOZBP unless (i) the property is acquired for use
in a QOZ that is designated after July 4, 2025, or (ii) one of the exceptions in section
5.01(2) and (3) of this notice applies.
(2) Property acquired pursuant to a working capital safe harbor plan after
December 31, 2026.
(a) In general. Section 1400Z-2(d)(3)(A)(ii) incorporates § 1397C(b)(8), which
requires that less than 5 percent of the average of the aggregate unadjusted bases of
the property of the relevant entity be attributable to nonqualified financial property in
each taxable year. In general, under § 1397C(e), “nonqualified financial property”
means debt, stock, partnership interests, options, futures contracts, forward contracts,
warrants, notional principal contracts, annuities, and other similar property specified in
regulations. However, under § 1397C(e)(1), this term does not include reasonable
amounts of working capital held in cash, cash equivalents, or debt instruments with a
term of 18 months or less. For purposes of applying § 1397C(e)(1) to a QOZB under
§ 1400Z-2(d)(3), § 1.1400Z2(d)-1(d)(3)(v) provides a safe harbor under which working
capital assets are treated as reasonable in amount if the following requirements,
provided in § 1.1400Z2(d)-1(d)(3)(v)(A) through (C), are satisfied. First, the working
capital assets must be designated in writing for the development of a trade or business
in a QOZ, including when appropriate the acquisition, construction, and/or substantial
improvement of tangible property in the QOZ. Second, there must be a written
schedule consistent with the ordinary start-up of a trade or business for expenditure of
those working capital assets. Under the schedule, the working capital assets must be
spent within 31 months of the receipt by the business of the assets. Third, the working

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capital assets must be used in a manner that is substantially consistent with the writing
and the written schedule. A single business may benefit from more than a single
application of the working capital safe harbor, provided that each application
independently satisfies all of the requirements of § 1.1400Z2(d)-1(d)(3)(v)(A) through
(C). See § 1.1400Z2(d)-1(d)(3)(v)(E). Additionally, pursuant to a working capital safe
harbor for start-up businesses that are not yet operating as a trade or business, these
entities may treat certain amounts as satisfying the requirements for QOZB qualification
under § 1400Z-2(d)(3)(i) for the duration of the working capital safe harbor. See
§ 1.1400Z2(d)-1(d)(3)(vi).
(b) Transition guidance regarding QOZBP. If an entity acquires property after
December 31, 2026, for use in a previously designated QOZ and pursuant to a written
plan meeting the requirements of the § 1.1400Z2(d)-1(d)(3)(v) and (vi) working capital
safe harbors, then that property may satisfy the acquisition requirement of § 1400Z-
2(d)(2)(D)(i)(I) if (i) the working capital plan was adopted on or before December 31,
2026, (ii) the relevant property acquisitions are made in a manner substantially
consistent with that plan, (iii) the QOZB has received at least ten percent of the total
estimated working capital assets designated in writing pursuant to the plan by
December 31, 2026, and (iv) the QOZB expends at least five percent of the total
estimated working capital assets by December 31, 2026. Amounts required to be
expended by a QOZB pursuant to a binding agreement entered into prior to January 1,
2027, will be considered to be expended for purposes of the requirement to expend five
percent of the total estimated working capital assets by December 31, 2026.
(c) Transition guidance regarding QOZP. Stock or partnership interests acquired

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after December 31, 2026, pursuant to a written plan described in this section 5.01(2),
are treated as acquired after the “applicable date” for purposes of § 1400Z-
2(d)(2)(B)(i)(I) and § 1400Z-2(d)(2)(C)(i).
(3) Tangible property acquired in the ordinary course of business after December
31, 2026, for use in a previously designated QOZ. Tangible property acquired after
December 31, 2026, by a QOF or QOZB for use in the ordinary course of its trade or
business in a previously designated QOZ to replace existing tangible business property
may be treated as QOZBP if the requirements of § 1400Z-2(d)(2)(D) are otherwise met.
Replacements in the ordinary course of a trade or business include the replacement or
modernization of property necessary to continue the operations of the trade or business.
Replacements in the ordinary course of a trade or business do not include tangible
property acquired pursuant to the expansion of a trade or business or the transition of a
trade or business into a new trade or business.
(4) Examples. The following examples illustrate the application of the provisions in
section 5.01(1) through (3) of this notice.
(i) Example 1—Tangible property acquired pursuant to the expansion of a trade
or business. QOZB A owns and operates an industrial manufacturing facility in Tract A,
which was designated as a QOZ in 2018 under prior § 1400Z-1. On June 15, 2028,
QOZB A purchases a new warehouse on an adjacent plot of land from an unrelated
third party to expand the facility’s capacity to produce a new product. The new
warehouse acquired by QOZB A on that date is not located in a tract that was
designated as a QOZ effective January 1, 2027. Because the new warehouse was not
acquired after the applicable start date of a tract designated as a QOZ on January 1,

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2027, it is not QOZBP under the general rule in section 5.01(1) of this notice. Because
the new warehouse was not developed pursuant to a written plan within the scope of
section 5.01(2) of this notice and was acquired pursuant to the expansion of QOZB A’s
trade or business within the meaning of section 5.01(3) of this notice, it cannot qualify
as QOZBP.
(ii) Example 2—Replacement of existing tangible business property in the
ordinary course of the trade or business. QOZB A owns and operates an apartment
building that is QOZBP in Tract B, which was designated as a QOZ in 2018 under prior
§ 1400Z-1. The apartment building is not located in a tract that was designated as a
QOZ effective January 1, 2027. In 2028 and in 2029, the apartment building requires
window replacements and the purchase of replacement appliances, fixtures, cabinetry,
flooring, and similar tangible property pursuant to the renovation of apartment units
when tenants vacate the premises. These acquisitions are necessary for the continued
operation of the apartment building and are replacements in the ordinary course of
business that qualify as QOZBP under § 1400Z-2(d)(2)(D). See section 5.01(3) of this
notice.
(iii) Example 3—Modernization of property necessary to continue the operations
of the trade or business. QOZB C operates a trade or business as a restaurant in
Tract D, which was designated as a QOZ in 2018 under prior § 1400Z-1. The
restaurant is not located in a tract that was designated as a QOZ effective January 1,
2027. In 2028, in order to maintain operations and embrace industry advancements,
the restaurant renovates and modernizes its kitchen, including adding a new ventilation
system to its kitchen to improve energy efficiency and replacing its point-of-sale system

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for a system with tools tailored specifically for the restaurant. The renovation and
modernization of the kitchen are necessary for the continued operation of the restaurant
in an efficient manner and are replacements in the ordinary course of business that
qualify as QOZBP under § 1400Z-2(d)(2)(D). See section 5.01(3) of this notice.
(iv) Example 4–Property acquired pursuant to a working capital safe harbor plan
adopted prior to December 31, 2026. QOF A forms domestic C corporation B (QOZB
B) to develop a large mixed-use real estate development that will consist of commercial
and residential real property. QOZB B has a master written plan for the completion of
the commercial and residential developments over a 55-month period that is estimated
to cost $50 million with $30 million allocated to the initial commercial development
phase and $20 million allocated to the subsequent residential development phase. The
plan provides that the commercial development will be completed over a 30-month
schedule, ending on November 30, 2026, and subsequently, the residential
development will be completed over a 25-month schedule, estimated to be completed
by December 31, 2028. The plan further provides that a portion of the commercial
development is unable to be used in a trade or business after the completion of the
commercial development since that portion of the commercial development will be
unusable during the residential construction phase. On May 1, 2024, QOF A acquires
stock of QOZB B in exchange for cash of $30 million. QOZB B expends the full $30
million in completing the commercial development by December 2026. Pursuant to
QOZB B’s original master plan for the completion of the real estate development, QOF
A acquires additional stock in QOZB B for cash in December 2026, and QOZB B begins
to use the cash for the residential development phase in early 2027. The development

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is located in Tract D, which was designated as a QOZ in 2018 under prior § 1400Z-1.
The development is not located in a tract that was designated as a QOZ effective
January 1, 2027. The mixed-use development satisfies the safe harbor in section
5.01(2) and acquisitions of tangible property made pursuant to the plan may qualify as
QOZBP if they are made in a manner substantially consistent with the plan.
(v) Example 5— Property acquired pursuant to a working capital safe harbor plan
adopted prior to December 31, 2026. The facts are the same as example 4, except that
in November 2027 it becomes apparent that the residential development is over budget,
delayed by three months, and will require additional capital to complete a portion of the
residential development that includes a swimming pool for use by apartment residents.
In December 2027, QOF A acquires additional stock of QOZB B solely in exchange for
cash. The cash received by QOZB B in December 2027 is expended in accordance
with the initial master plan established in 2024 to complete the residential apartment
complex, including the completion of the swimming pool. The residential development
is completed and placed into service by March 2029. The swimming pool was an
integral part of the initial master plan established by QOZB B in May 2024. See
§ 1.1400Z2(d)-1(d)(3)(vi)(A). The commercial and residential real property may qualify
as QOZBP assuming the other requirements of § 1400Z-2(d)(2)(D) are met. Because
the stock was acquired in exchange for cash needed to complete development of the
project, it may be treated as having been acquired after the applicable date pursuant to
section 5.01(2)(c) of this notice.
.02 Compliance tests after a QOZ designation period ends.
(1) In general. Section 70421(c)(3) of the OBBBA amended prior § 1400Z-2(c) by

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providing that, in the case of any qualifying investment held by the taxpayer for at least
10 years and with respect to which the taxpayer makes an election under that
subsection, the basis of such qualifying investment equals its fair market value on the
earlier of (i) the date such qualifying investment is sold or exchanged, or (ii) the date
that is 30 years after the date of that qualifying investment. Section 1400Z-2(c) is
effective for amounts invested in QOFs after December 31, 2026. See § 70421(c)(5)(A)
of the OBBBA. Prior § 1400Z-2(c) allowed a taxpayer holding a qualifying investment
for at least 10 years to make an election under prior § 1400Z-2(c) to adjust the basis of
the property equal to the fair market value of that qualifying investment on the date that
qualifying investment was sold or exchanged (without regard to the number of years
that have passed since the date of the qualifying investment). Section 1.1400Z2(c)-1(c)
provides that, for dispositions occurring before January 1, 2048, the ability to make an
election under prior § 1400Z-2(c) for qualifying investments held for at least 10 years is
not impaired solely because, under § 1400Z-1(f), the designation of one or more QOZs
ceases to be in effect. See also § 1.1400Z2(c)-1(d), Example 1. Section 1400Z-2(d)
contains multiple requirements the satisfaction of which are dependent on whether
property owned by a QOF or QOZB, or a trade or business engaged in by a QOF or
QOZB, is located in a QOZ. Given that § 1400Z-2(c) and § 1.1400Z2(c)-1(c)
contemplate the ability to continue a qualifying investment made in a QOZ after its
designation as a QOZ ceases to be in effect, the Treasury Department and the IRS
expect that the forthcoming proposed regulations will include the following safe harbors
for QOFs and QOZBs to continue to satisfy these requirements after the expiration of a
QOZ’s designation period.

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(2) Substantial use element of the definition of QOZBP. For tangible property to
qualify as QOZBP, substantially all of the use of that property must be in a QOZ for
substantially all of the entity’s holding period for such property. See § 1400Z-
2(d)(2)(D)(i)(III); see also § 1.1400Z2(a)-1(b)(3). If property otherwise qualifies as
QOZBP, a QOF or QOZB that acquires that property on or before the expiration of its
QOZ designation period (December 31, 2027, or December 31, 2028, as applicable), or
pursuant to sections 5.01(2) or 5.01(3) of this notice, may continue to treat a previously
designated QOZ the designation of which has expired as a QOZ solely for purposes of
§ 1400Z-2(d)(2)(D)(i)(III) through December 31, 2047.
(3) QOZB Compliance Tests. For an entity to qualify as a QOZB, at least 50
percent of its gross income must be derived from the active conduct of a trade or
business in a QOZ, and a substantial portion of its intangible property must be used in
the active conduct of a trade or business in a QOZ. See § 1400Z-2(d)(3)(A)(ii); see also
§ 1.1400Z2(d)-1(d)(3)(i) and (ii). A QOZB that has begun to engage in the active
conduct of a trade or business within a previously designated QOZ on or before the
expiration of its QOZ designation period (December 31, 2027, or December 31, 2028,
as applicable), or that reasonably anticipates to begin doing so in accordance with a
written plan that meets the requirements of section 5.01(2) of this notice, may continue
to treat a previously designated QOZ the designation of which has expired as a QOZ
solely for the purposes of § 1400Z-2(d)(3)(A)(ii) through December 31, 2047.
SECTION 6. APPLICABILITY DATE
The Treasury Department and the IRS anticipate that the forthcoming proposed
regulations will propose that the final regulations, once published in the Federal

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Register, would apply to taxable years ending after the date this notice is issued to the
public. See § 7805(b)(1)(C).
SECTION 7. DRAFTING AND CONTACT INFORMATION
The principal author of this notice is Maria Castillo Valle of the Office of Associate
Chief Counsel (Income Tax & Accounting). For further information regarding this notice,
contact Ms. Castillo Valle at (202) 317-7006 (not a toll-free number).