The Treasury Department and Internal Revenue Service issued new guidance last week addressing a critical transition question for Opportunity Zone investors: how to maintain tax incentives in census tracts designated under the original OZ 1.0 regime. IRS Notice 2026-40 previews rules the agencies intend to include in forthcoming regulations, focusing on new OZ designations, transition rules for investors with existing deferred gains, and operational guidelines for Qualified Opportunity Funds and Qualified Opportunity Zone Businesses in zones designated under prior law. The notice was covered by Tax Notes on June 18 and Reuters on June 22.
The guidance arrives as a major development for Opportunity Funds and OZ businesses with projects in OZ 1.0 census tracts. While the One Big Beautiful Bill Act permanently extended and improved the OZ tax incentives, it left unresolved tax questions affecting investments in expiring OZ 1.0 tracts. Chief among these questions: how far along a project must be before a census tract expires, and whether future capital expenditures can continue to qualify for the tax incentives. Those gaps created uncertainty for developers and fund managers operating on multi-year deployment timelines.
Under the notice, property acquired after December 31, 2026, in a previously designated OZ may still qualify if certain conditions are met. The OZ business must have a written working capital plan in place by December 31, 2026, and future property acquisitions must be consistent with that plan. Additionally, the business must receive at least ten percent of its estimated working capital assets by year-end and must expend at least five percent of those assets by December 31, 2026. These thresholds establish a concrete framework for determining whether a project can continue to access OZ benefits after the original tract designation expires.
The notice also clarifies how OZ compliance tests apply after an OZ 1.0 census tract expires. In certain cases, a previously designated OZ can continue to be treated as a qualifying zone for purposes of the substantial use test and the requirement that at least fifty percent of a business's gross income be derived from the active conduct of a trade or business in a qualified OZ. This clarification removes a significant compliance burden for businesses that structured their operations around the original tract boundaries and would otherwise face disqualification solely due to the expiration of those designations.
The IRS guidance partially adopts a framework proposed by the Real Estate Roundtable that focuses on whether an OZ business has a working capital safe harbor plan in place going forward. The Roundtable has consistently urged Treasury and the IRS to provide transition rules for OZ 1.0 projects, including through a December 2025 letter, March 2026 follow-up comments, and draft guidance developed by the organisation's Opportunity Zone Working Group. The Roundtable emphasized that unresolved questions surrounding expiring census tract designations could delay projects, discourage new fund formation, and undermine housing production and community development efforts.
The guidance provides important certainty for real estate investors, developers, and businesses seeking to move forward with projects in low-income communities during the transition from OZ 1.0 to the new permanent OZ framework. For fund managers, the notice establishes clear milestones for year-end compliance and reduces the risk that capital already committed to projects will lose its tax-advantaged status. For developers with multi-phase projects, the working capital plan requirement offers a pathway to continue development activity beyond the original tract expiration without forfeiting OZ benefits on future phases.
The issuance of Notice 2026-40 marks a major step forward in providing greater certainty for long-term OZ investment in underserved communities. While the notice includes many important details that remain under review, its publication resolves immediate questions about year-end deadlines and compliance thresholds. The Real Estate Roundtable's Opportunity Zone Working Group will review the implications of Notice 2026-40 in the days ahead and continue to engage with Treasury and the IRS to support clear, workable implementation of the new OZ framework. Additional regulations are expected to follow as the agencies finalize the permanent OZ rules under the One Big Beautiful Bill Act.