The original Opportunity Zone program, created by the 2017 Tax Cuts and Jobs Act, was always structurally impermanent. The capital gains deferral window had an end date. The 10-year exclusion was available but uncodified beyond the program's statutory sunset. Sophisticated investors have been watching the OZ 2.0 legislative process closely because the reform package resolves several of those structural uncertainties — and introduces new ones.

Here is a factual breakdown of what changed, what it means for active investments, and what the December 31, 2026 deadline actually requires.

## What Is OZ 2.0?

OZ 2.0 refers to the legislative redesign of the Opportunity Zone program that takes effect January 1, 2027. The core change is permanence: where OZ 1.0 was a time-limited program tied to a fixed designation cycle, OZ 2.0 creates a standing, renewable program with periodic re-designation of qualifying census tracts.

The permanent structure was the primary ask from institutional OZ investors and community development advocates alike. A program that might sunset creates investor hesitancy; a program that is permanent encourages long-term capital formation in the communities that need it most.

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## OZ 1.0 vs. OZ 2.0: Side-by-Side Comparison

| Feature | OZ 1.0 (2017 TCJA) | OZ 2.0 (Permanent, Eff. 2027) |

|---|---|---|

| Program structure | Time-limited, fixed zone designations | Permanent, periodic re-designation |

| Number of zones | ~8,764 nationwide | ~6,300–6,544 (tightened eligibility) |

| Capital gains deferral | Deferred until Dec 31, 2026 | Deferred 5 years from investment date (rolling) |

| Step-up in basis | 10% after 5-year hold; 15% after 7-year hold (7-year window closed) | 10% step-up after 5-year hold (15% tier removed) |

| 10-year exclusion | Available — no cap; applies to QOF appreciation | Available — FMV capped at 30 years from investment |

| Rural bonus (QROF) | Not available | QROFs receive 30% basis step-up after 5 years (triple the standard 10%); substantial improvement threshold reduced from 100% to 50% of building's adjusted basis |

| Investor reporting | Minimal standardized disclosure | Annual reports required: NAICS codes, exact census tracts, tangible/intangible property values, residential units produced, average monthly FTE employees, investor disposition data |

| Zone eligibility criteria | Low-income census tracts, governor-nominated | MFI ≤70% of statewide/metro benchmark; OR poverty rate ≥20% with anti-gentrification cap requiring MFI ≤125% of benchmark |

| Contiguous zones | Allowed (tracts adjacent to qualifying low-income tracts could be designated) | Completely eliminated |

| Re-designation cycle | N/A (fixed 10-year designation) | Periodic review and renewal based on updated census data |

| Grandfathering | N/A | Existing OZ 1.0 investments retain all OZ 1.0 benefits regardless of zone re-designation |

| Effective date | January 1, 2018 | January 1, 2027 |

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## Key Changes in Detail

### 1. Program Is Now Permanent

Effective January 1, 2027, the OZ program does not expire. Zones will be re-designated on a rolling cycle — likely every 10 years — based on updated census data. This permanence is significant for sponsors planning multi-cycle fund strategies and for investors who want OZ exposure beyond the original program window.

### 2. Zone Count Tightened from ~8,764 to ~6,300–6,544

OZ 2.0 applies stricter census-tract eligibility criteria, including poverty rate floors, unemployment thresholds, and median income caps. The result is that roughly 2,200–2,464 zones that qualified under 1.0 will not qualify under 2.0. This means some current OZ projects in marginal areas lose their designation when zones are reassigned.

**Grandfathering:** Existing OZ 1.0 investments are fully grandfathered. QOF investments made before January 1, 2027 retain all OZ 1.0 benefits — including the 10-year exclusion — regardless of whether the underlying zone retains designation under OZ 2.0. There is no retroactive loss of status.

For investors evaluating new commitments in 2026, the relevant question is whether the target property sits in a zone likely to retain its designation under 2.0 criteria, particularly for long-hold strategies.

### 3. Capital Gains Deferral: Fixed Window Replaced by Rolling 5-Year Window

Under OZ 1.0, all deferred gains become taxable on December 31, 2026, regardless of when the investment was made. Under OZ 2.0, investors defer gains for 5 years from the date of their QOF investment — creating a rolling deferral window. Someone investing in a QOF in March 2027 would defer their gain until March 2032.

This is a significant structural improvement. OZ 1.0's single December 31, 2026 inclusion date created a compressed, mandatory tax event. OZ 2.0's rolling window aligns the deferral period with individual investment timing.

### 4. Step-Up in Basis: 10% After 5 Years (15% Tier Removed)

OZ 1.0 originally offered a 10% step-up at 5 years and an additional 5% at 7 years (total 15% reduction). The 7-year step-up was functionally eliminated because the December 31, 2026 inclusion date made the 7-year hold period impossible for investments made after 2019. OZ 2.0 codifies the 10% step-up at 5 years and removes the 15% tier entirely.

### 5. 10-Year Exclusion: FMV Cap at 30 Years

The 10-year capital gains exclusion remains the cornerstone benefit under OZ 2.0, but with a new guardrail: fair market value for purposes of the exclusion is capped at 30 years from the date of investment. This effectively prevents indefinite deferral strategies where investors hold QOF interests for 40+ years to maximize the exclusion. For most real estate QOF investments with 10–15 year hold periods, the 30-year cap has no practical impact.

### 6. Rural Bonus Incentives (QROF)

OZ 2.0 introduces the Qualified Rural Opportunity Fund (QROF) framework — additional incentives for investments in rural Opportunity Zones, which have historically attracted less capital than urban zones despite having equivalent federal benefits. QROFs receive a 30% basis step-up on the deferred gain after a 5-year holding period — triple the standard 10% step-up available to non-rural QOFs. Additionally, the substantial improvement threshold for existing properties in rural zones is reduced from 100% to 50% of the property's adjusted basis, making it significantly easier to qualify renovations in rural areas. For urban-core sponsors like Savoy operating in Dallas and Austin, the rural bonus does not apply — but investors evaluating rural OZ deals should understand that the economics are meaningfully different under OZ 2.0.

### 7. Enhanced Reporting Requirements

OZ 2.0 requires annual standardized reporting from both QOFs and underlying QOZ businesses. The reporting framework covers:

- **Employment data:** Jobs created and retained within the OZ

- **Income levels:** Median income of residents served by QOZ investments

- **Capital deployment:** Total capital deployed per zone, broken down by asset type

- **Return metrics:** Fund-level and project-level return reporting to Treasury

This is a significant change from OZ 1.0's minimal disclosure requirements and will add meaningful compliance costs for fund managers. Institutional sponsors with existing reporting infrastructure — including audited financials, K-1 issuance systems, and investor portals — have a structural advantage over smaller operators.

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## The December 31, 2026 Deadline and What It Actually Means

The December 31, 2026 deadline is the OZ 1.0 capital gains inclusion date. On that date, all deferred gains invested under OZ 1.0 rules become taxable — regardless of how long the QOF investment has been held. If you deferred $500,000 in gains and received the 10% step-up, you owe federal tax on $450,000 on your 2026 tax return.

This date is not the end of the OZ program. OZ 2.0 begins January 1, 2027. Investors who want the 10-year exclusion under OZ 1.0 rules — no capital gains tax on QOF appreciation after a 10-year hold — must have invested their gains by December 31, 2021 to have a 10-year hold by December 31, 2031 (the last date the IRS has confirmed supports the OZ 1.0 exclusion election).

For investors with 2025 or 2026 gains: investing in a QOF before December 31, 2026 places you entirely under OZ 1.0 rules. The deferred gain is included on December 31, 2026, and the 10-year appreciation exclusion is available under OZ 1.0 for the QOF investment's appreciation — provided you hold for at least 10 years. Alternatively, investing after January 1, 2027 places you under OZ 2.0 rules with the rolling 5-year deferral and the same 10-year exclusion.

The practical question for investors with gains in hand right now: does a 2026 investment — accepting the December 31, 2026 deferral inclusion in exchange for locking in OZ 1.0's well-established rules and the 10-year exclusion — make sense? For most accredited investors with meaningful capital gains, the answer is yes, provided the underlying fund and sponsor are sound.

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## What Investors Should Do Now

**If you have 2024 or 2025 capital gains:**

Your 180-day window for 2025 gains runs through mid-2026 (with the partnership rule potentially extending to June 29, 2026). Identify a qualified sponsor and fund before that window closes.

**If you are evaluating an existing OZ fund position:**

The December 31, 2026 inclusion event is real — plan for the tax liability now. If your QOF investment has appreciated meaningfully, the 10-year exclusion on that appreciation may still be available depending on your entry date.

**If you are starting from scratch in 2026:**

You are investing in the OZ 2.0 world on a 1.0 calendar. Focus on sponsors who (a) know both frameworks, (b) are operating in zones likely to retain designation, and (c) have a genuine 10-year operating plan that doesn't depend on early exit.

**Verify OZ expertise, not just exposure:**

Many real estate sponsors added "OZ fund" to their offering documents in 2018–2020. Tax expertise in OZs — cost segregation, QOZB compliance, 90% asset test management, substantial improvement documentation — requires years of operational experience. Savoy Equity Partners has been operating in Opportunity Zones since the program's inception, with $92M+ deployed in OZ assets across Dallas.

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