OZ 1.0 to OZ 2.0: How to Time Your Capital Gains

The original Opportunity Zone tracts expire December 31, 2026. OZ 2.0 takes effect January 1, 2027 with new census tract designations. If you're sitting on capital gains, the timing question is real: deploy now into OZ 1.0, or wait for OZ 2.0?

What's Different in OZ 2.0

The 5-year and 7-year basis step-ups (10% and 15% reductions on deferred gains) are gone. The deferral period is now rolling, 5 years from the date of investment rather than a fixed deadline. New reporting requirements are stricter, including annual Form 8996 filings and detailed investor reports. Non-compliance can disqualify your fund entirely.

The 10-year exclusion on gains from the OZ investment itself remains. That's still the biggest incentive.

The Timing Decision

If you have capital gains from 2025 or early 2026 and can identify a strong deal in a current OZ tract, deploying now starts the 10-year clock sooner. You also lock in existing tract designations that may not be renewed under OZ 2.0.

If you want access to the new rural zone designations (which offer a 30% basis step-up at 5 years), you need to wait until OZ 2.0 tracts are certified in 2027.

The 180-day investment window from the sale of your appreciated asset applies under both regimes. Plan around that clock.

Compliance Costs Are Higher

Under OZ 2.0, expect to spend $10,000-$15,000 annually on compliance for a small fund. Annual filings, investor reporting, and audit documentation are now mandatory. This eats into returns on smaller deals.

The Bottom Line

| | OZ 1.0 (through 2026) | OZ 2.0 (starting 2027) | |---|---|---| | Basis Step-Ups | 10% at 5yr, 15% at 7yr | None (except 30% rural at 5yr) | | Deferral Period | Fixed Dec 31, 2026 | Rolling 5 years from investment | | 10-Year Exclusion | Yes | Yes | | Reporting | Minimal | Strict annual filings | | Compliance Cost | Low | Higher |

Deploy now if you have a strong deal in a current tract. Wait if you want rural bonuses or need more time to find the right project. Either way, the 10-year clock is your friend. Start it when the deal quality justifies it, not just for the tax benefit.