Two of the Opportunity Zone program's three original tax breaks are gone: the 10% basis step-up (five-year hold, invested by December 2021) expired December 31, 2025, and the 15% step-up (seven-year hold, invested by December 2019) has expired too. What remains is the 10-year benefit, where holding a fund for a decade can erase federal tax on its appreciation. For real-estate gains specifically, a 1031 exchange still offers open-ended deferral that OZ no longer matches.
Last updated: March 2026
The Opportunity Zone (OZ) program launched in the 2017 Tax Cuts and Jobs Act with three tax breaks meant to steer capital into economically distressed communities. Two of the three have expired. One remains. And a single date, December 31, 2026, now hangs over everyone still holding a deferred gain in a fund.
The three original benefits
When the program launched, an investor who moved eligible capital gains into a Qualified Opportunity Fund (QOF) got three things:
- Deferral of the original gain. Tax on the gain you invested was postponed until the earlier of an inclusion event, such as selling your fund interest, or December 31, 2026.
- A partial step-up on the deferred gain. Hold the fund interest for five years and your basis rose 10%. Basis is the figure your taxable gain is measured against, so a higher basis meant a smaller eventual tax bill on the deferred gain. Hold for seven years and you earned another 5%, for a 15% step-up in all.
- Exclusion of gain on the fund's own appreciation. Hold for at least 10 years and you could elect a basis equal to fair market value, erasing federal tax on any appreciation the fund generated after you invested.
What has expired
The 15% step-up
To earn the 15% step-up, you had to invest by December 31, 2019 and hold for seven years. That seven-year window closed on December 31, 2026. Investors who made the deadline got the benefit. Anyone who invested after December 31, 2019 never had access to it.
The 10% step-up, gone since December 31, 2025
The 10% step-up required investing by December 31, 2021 and holding for five years. That deadline passed on December 31, 2025. As of January 2026, no investor can still reach it.
What the expirations change
The step-ups were what made OZ partly competitive with 1031 exchanges for real estate gains. Cutting a taxable gain by 10% or 15% narrowed the distance between OZ's fixed deferral and the open-ended deferral a 1031 allows. With the step-ups gone, OZ keeps two features: the deferral, which ends December 31, 2026, and the 10-year appreciation exclusion. Investors who got in early and captured the step-ups keep them. New investors are working without them.
What remains: the 10-year appreciation exclusion
The surviving benefit is the exclusion of gain on appreciation inside the fund. Hold a QOF for at least 10 years and you can elect to reset the basis of your fund interest to its fair market value at sale, which removes federal tax on the appreciation earned inside the fund after you invested.
An example. You put $500,000 of eligible capital gains into a QOF in 2024, and the fund backs a real estate development in a designated Opportunity Zone. By 2034 the stake is worth $750,000. Sell after the 10-year hold, elect a basis of $750,000, and the $250,000 of appreciation escapes federal income tax.
What it does not cover. Your original $500,000 deferred gain. That gain is recognized no later than December 31, 2026, no matter how long you hold, and the tax on it lands on your 2026 return.
Two things have to be true for the exclusion to be worth anything:
- You hold for at least 10 years.
- The fund actually appreciates. Flat or down, there is no gain to exclude.
The December 31, 2026 recognition date
Every deferred gain in a QOF is recognized on December 31, 2026, the statutory inclusion date, regardless of when the money went in. An investor who bought into a QOF in January 2019 and one who invested in January 2026 recognize the deferred gain on the same day.
For anyone still holding deferred gains, that is a cash bill. The tax comes due with the 2026 return, filed in April 2027, whatever the investment is worth by then.
What the 2025 law changed: the One Big Beautiful Bill Act
The One Big Beautiful Bill Act, passed in 2025, reshapes the OZ map going forward in two ways:
- New rural zone designations. The law authorizes a fresh round of OZ designations aimed at rural communities, widening the program's geographic reach.
- Updated designations. The original zones, drawn in 2018 from 2010 Census tract data, were set to expire. The new law provides for updated designations based on more recent data.
Both point to continued Congressional interest in the program, but neither restores the expired step-ups. IRS guidance on the updated designations and the new rules is still to come.
OZ versus 1031, under 2026 rules
For real estate investors, the two programs now line up like this:
Factor | 1031 Exchange | Opportunity Zone (2026 Rules) |
|---|---|---|
Eligible gains | Real estate only | Any capital gain (stocks, business, crypto, real estate) |
Deferral duration | Indefinite (as long as you keep exchanging) | Until December 31, 2026 |
Basis step-up on deferred gain | N/A | Expired |
Gain on appreciation | Deferred through serial exchanges; eliminated via stepped-up basis at death | Excluded after 10-year hold (if fund appreciates) |
Investment flexibility | Any like-kind real property | Must be in a designated Opportunity Zone |
State tax treatment | Generally deferred at federal and state levels | Federal only; state conformity varies |
Liquidity | Can sell and exchange at any time | 10-year hold required for appreciation benefit |
Stepped-up basis at death | Yes | No equivalent provision |
For a gain from selling real estate that goes back into real estate, a 1031 exchange offers what OZ no longer can: deferral with no fixed end date rather than a stop at December 31, 2026, a choice among any like-kind real property rather than only designated zones, deferral at the state level in many states, and a basis step-up at death that passes appreciation to heirs untaxed. OZ has no equivalent to that last one.
OZ's remaining edge shows up in a narrower set of cases:
- Non-real-estate capital gains. A 1031 exchange covers real property only. If your gain came from selling a business, stock, or cryptocurrency, OZ is one of the few vehicles that offers any deferral or exclusion at all.
- Mission-aligned investing. Investors who want their capital in economically distressed communities can pair the tax treatment with that goal.
- Conviction in the project. The 10-year exclusion pays off only if the fund appreciates meaningfully, so it rewards investors with a strong view on a specific project's growth.
- The new rural zones. The expanded rural designations from the 2025 law may open areas where the development math is attractive.
Where current investors stand
Invested before 2022 and still holding
Your deferred gain is recognized on December 31, 2026, and the tax is due with the 2026 return. From there the fork is straightforward: hold toward the 10-year mark to reach for the appreciation exclusion, a bet that rides on how the fund performs, or exit and redeploy the capital elsewhere, potentially through a 1031 exchange if the proceeds trace back to real estate.
Weighing a new OZ investment in 2026
The deferral is now negligible. A gain invested in a QOF in 2026 is recognized on December 31, 2026, the same year it goes in. That leaves only the 10-year exclusion, a decade-long commitment whose payoff depends entirely on fund performance. The tax incentive is thin enough that such an investment largely has to stand on its own economics.
State taxes
OZ is a federal incentive, and states treat it differently.
- States that conform to the federal rules defer the gain at the state level too, and recognize it on December 31, 2026, in step with the federal timeline.
- States that do not conform may tax the gain right away, even while it stays deferred federally, which can be an unwelcome cash-flow surprise for an investor who expected full deferral.
So whether an OZ investment defers state tax depends on where you are. A 1031 exchange generally defers both federal and state tax, though states like California track the deferred gain through clawback provisions.
For a side-by-side look at the two strategies, see 1031 vs. Opportunity Zone. To weigh which approach fits your own situation, talk to an advisor.
With the step-ups gone, an OZ investment now leans on a single feature, the 10-year appreciation exclusion, which only pays off if the fund grows. For real-estate gains, a 1031 exchange still offers the open-ended deferral and death-time basis step-up that OZ lacks; OZ's clearest remaining use is for gains a 1031 can't touch, like stock, business, or crypto.
Frequently asked questions
What happened to the Opportunity Zone basis step-up?
The 10% step-up (for five-year holds on investments made by December 31, 2021) expired on December 31, 2025. The 15% step-up (for seven-year holds, which required investing by December 31, 2019) has also expired. Both were phased benefits, and both are now gone.
What's left from the Opportunity Zone program?
The 10-year hold benefit. Invest in a QOF and hold for 10 years, and you may eliminate federal tax on the appreciation of that investment. It applies only to the OZ investment's own gain, not to the original capital gain you deferred, which is recognized no later than December 31, 2026.
Is Opportunity Zone better than 1031?
They fit different situations. For real estate, a 1031 exchange defers gains with no fixed end date and lets you reinvest in any like-kind real property, while OZ limits you to qualifying zones and businesses. OZ can still matter for non-real-estate capital gains, like stock, crypto, or business interests, put into OZ real estate projects.
Can I do a 1031 exchange into an Opportunity Zone?
Yes. You can use 1031 proceeds to acquire real property in an Opportunity Zone, which can combine the two sets of benefits in some cases.
Are there any recent legislative changes to Opportunity Zones?
Yes. The One Big Beautiful Bill Act (2025) adds new rural Qualified Opportunity Zone provisions and a coming round of updated designated zones. It does not restore the expired basis step-ups, but it does signal continued Congressional interest in the program. IRS guidance on the updated designations and rules is still to come.