OZ 2.0 transition notice: What investors need to know
Opportunity zones were created as part of the Tax Cuts and Jobs Act of 2017 to stimulate long-term private investments in low-income communities nationwide. Recognizing the success of the bipartisan initiative for both investors and communities, Congress made the Opportunity Zone (OZ) program permanent in Working Families Tax Cuts legislation, signed into law July 4, 2025.
With new opportunity zones expected to be announced in late fall 2026 and the current zones set to expire at the end of 2028, what actions can interested OZ investors take during this unusual transition period? In this video, Capital Square executive vice president, co-head of development, Natalie Mason makes it clear investors needn’t sit on the sidelines.
Mason breaks down what to expect based on a notice issued by the IRS in June and answers two key questions that many in the investment community are asking right now:
- Can pre-development projects located in expiring census tracts still be considered “good” OZ projects for tax purposes once the new census tracts are designated as of January 1, 2027?
- Can new investors still invest in OZ projects in expiring census tracts after January 1, 2027, and receive the new tax benefits afforded under the Working Families Tax Cuts legislation?
According to Mason, our open offering, Opportunity Zone Fund IX in Richmond, VA, currently in pre-development, already meets the requirements outlined in the IRS notice, providing comfort for existing and future investors.
Watch the video to learn more:
In short:
A recent IRS notice clarifies paths forward for both OZ investment and development during the program’s transition period. How might opportunity zones fit your long-term strategies?
Connect with our team to learn more.
Additional resources:
IRS Notice 2026-40: Transitional Guidance on Qualified Opportunity Zones (PDF)
OZs connect private capital with economic growth (website)
OZs are a core advisor tax strategy (video)
Novogradac Tax Credit Tuesday Podcast (YouTube video)
Jimmy Atkinson Opportunity Zones 2.0 Webinar (YouTube video)
Approximate transcript:
Natalie Mason
The Working Families Act that was passed last year and made opportunity zones permanent was a great thing for our industry, but it left questions about how the IRS will view this transition period when there are two opportunity zone (OZ) maps that are in effect. And so, as an industry, we’ve been waiting for guidance from Treasury as to how they will handle these projects during this transition period, and this is important for investors who are currently evaluating opportunity zone investment, as it provides clarity now on how the IRS will treat these developments that are located in census tracts that are designated now but will not be going forward.
Since the notice came out on June 18th, we’ve been talking to a lot of our colleagues and other experts in the OZ space to interpret what we’re reading in the notice. We’re thrilled to be a part of the Novogradac Opportunity Zone Working Group, the Real Estate Roundtable’s Opportunity Zone Working Group, the EIG Opportunity Zones Working Group, as well as talking with legal experts who work in this space. There is consensus that the guidance in this notice sets a framework that is positive for opportunity zone investors and positive for opportunity zone developers and sponsors.
The notice provides comfort for investors who are invested in projects that are currently in pre-development or underway that these projects will still be qualified opportunity zone projects, even though the census tracts are expiring. It also creates an opportunity for investors who have gains in the second half of 2026 to consider investing into 1.0 census tract developments that are currently available and open. The IRS notice creates a roadmap or a path for what the projects need to achieve by year end to still be considered qualified opportunity zone projects after January 2027.
So, to get into some of the specifics, the general rule, as laid out in the notice, is that for property acquired into an opportunity zone business after January 1, 2027, that property needs to be in a census tract in the OZ 2.0 map, generally speaking, but there are two exceptions. The first exception is around projects that maybe are in the planning phase right now that have not yet gotten to a point of closing on the land and starting development. The requirement is that there needs to be a working capital safe harbor plan in place for this project by the end of 2026. This is a written plan that lays out exactly what the project is going to be, what the general budget is, and where the project is located. So, this plan has to be in place before the end of the year. Any property acquired after January 1st, 2027, has to be consistent with this working capital safe harbor plan.
In addition to having the working capital safe harbor plan written and in place by the end of this year, the qualified opportunity zone business also has to meet two tests. The first is that the business has to have raised 10% of its estimated working capital before year end. So, if it’s a $100 million project, it has to have in place or have raised 10% of that $10 million by year end, and furthermore, have to have spent 5% of the estimated cost by the end of 2026. Those costs could be pre-development costs, acquisition costs, anything that’s part of that working capital plan. So those are two tests that have to be achieved by the end of 2026.
The second exception to the general rule, that property acquired after January 2027 needs to be in an OZ 2.0 census tract, is related to modernization plans. This provision is intended to facilitate reinvestment into projects that need major capital improvements, things like new roofs. So, this notice provided comfort around those improvements. Those modernizations can be made without jeopardizing the OZ status of the development.
So, which OZ 1.0 projects are okay? Well, if you’ve already acquired the property and you already have a working capital safe harbor plan in place, then you’re in great shape. We actually think projects in expiring 1.0 census tracts will be very attractive investment offerings for OZ capital. Why? For a couple reasons. If you think about it, 1.0 census tracts have been in place now for almost 10 years. We already know which census tracts have seen a lot of investments and which ones have not. We have already seen where there has been economic growth in certain census tracts, projects in 1.0 census tracts today that are in pre-development or present compelling investment potential because the markets themselves have been de-risked. The markets themselves and the sub-markets are already very known.
The other reason is because projects that are in pre-development in 1.0 census tracts are likely more shovel-ready than projects that are going to be investment-ready in 2027, in 2.0 census tracts. We, as an industry, don’t yet know what the 2.0 census tracts will be. We won’t know until the end of this year.
Our current open offering, Opportunity Zone Fund IX, located at 1600 Roseneath Road in the Scotts Addition neighborhood of Richmond, Virginia, is a really good example of the type of project that we think the IRS intended to support and provide comfort for with the notice. This project has been in the works for many months. The land is already acquired. We have been going through permitting, design, and other regulatory processes to start construction shortly. And this is a shovel-ready project in an existing opportunity zone neighborhood. And the IRS notice has given comfort to our current investors and investors looking at this offering, that this project will be viewed as a qualified opportunity zone project going forward, and in fact, we think it’s a very compelling investment offering for investors who experience gains in the second half of 2026 and could deploy into a 1.0 census tract deal in the beginning of 2027.
We at Capital Square are thrilled to be at the forefront of opportunity zone developing and investing, and plan to continue to be your resource for opportunity zones going forward. The notice is just a notice. There will be proposed regulations that will come, but it’s clear that the IRS wanted to set the stage, set the expectations, and give comfort to the industry ahead of those regulations coming out, likely towards the end of this year.
Disclosure: Securities offered through WealthForge Securities, LLC, Member FINRA/SIPC. Capital Square and WealthForge Securities, LLC are separate entities. There are material risks associated with investing in DST properties and real estate securities including illiquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning and operating commercial and multifamily properties, short-term leases associated with multifamily properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and potential loss of the entire investment principal. Past performance is not a guarantee of future results. Potential cash flow, returns and appreciation are not guaranteed. IRC Section 1031 is a complex tax concept; consult your legal or tax professional regarding the specifics of your particular situation. This is not a solicitation or an offer to sell any securities. Please read the Private Placement Memorandum (PPM) in its entirety, paying careful attention to the risk section prior to investing. Private placements are speculative and illiquid. Diversification does not guarantee profits or protect against losses. FINRA Broker Check link: brokercheck.finra.org.
