How the Opportunity Zone 10-Year Rule Works

Short answer: the Opportunity Zone 10-year rule says that if you hold your investment in a qualified opportunity fund (QOF) for at least 10 years, you can elect to set your tax basis equal to the investment’s fair market value when you sell it. Sale price minus basis is then zero, so the appreciation on the QOF investment isn’t subject to federal capital gains tax (IRC §1400Z-2(c); IRS Opportunity Zones FAQ).

It’s the biggest of the three Opportunity Zone tax benefits, and the least understood. Here’s how it works, what it doesn’t cover, and the time limits.

How it works, in four points

1. Invest eligible gain in a QOF within 180 days and elect deferral (how to invest, step by step).
2. Hold the QOF interest at least 10 years. The clock runs from the date you invested in the fund.
3. Sell or exchange the interest and elect, on your return for that year, to treat your basis as its fair market value on that date.
4. No federal capital gains tax on the growth. The appreciation of the QOF investment is excluded.

A worked example

Say you invest a $500,000 capital gain in a QOF in March 2027 and sell the interest for $1,200,000 in April 2037, after more than 10 years.

• The original $500,000 gain was deferred, then recognized in March 2032, five years after the investment. A five-year hold increased basis by 10% of the deferred gain, so $450,000 was taxable then (or $350,000 with the 30% step-up for a qualified rural fund) (P.L. 119-21 §70421).
• The $700,000 of growth ($1,200,000 minus $500,000) is excluded under the 10-year election.

This is a simplified illustration. It ignores fund-level income, losses, distributions and state tax. Try your own numbers in the basis step-up and 10-year exclusion calculator or the Opportunity Zone tax calculator.

What the 10-year rule does not do

• It doesn’t forgive the original gain. That gain is only deferred. See Opportunity Zone tax benefits.
• It doesn’t cover money that wasn’t eligible deferred gain. A QOF investment that mixes eligible gain with other cash is treated as two separate investments, and only the deferred-gain part gets the benefits (IRC §1400Z-2(e)(1)).
• It doesn’t apply if you sell early. Selling before 10 years also ends the deferral of the original gain.
• It doesn’t override state law. States don’t all follow the federal Opportunity Zone rules.

Time limits: 2047 for older investments, 30 years for new ones

For new investments, appreciation after the 30-year date is taxable when you eventually sell. More on the 2027 changes: OZ 1.0 vs OZ 2.0.

Selling assets inside the fund after 10 years

Investors in partnership and S corporation QOFs held 10 years or more can also elect to exclude certain capital gains from the fund’s own sales of property, under Treasury’s final regulations, not just gains from selling their fund interest (Treas. Reg. §1.1400Z2(c)-1(b)(2)). This is technical, so how a fund plans to exit is worth asking about. See Opportunity Zone exit strategies.

Reporting

You report the sale and the election on your return for the year of the sale, and you keep filing Form 8997 every year you hold the QOF interest, including the year you dispose of it. Our Form 8997 guide lays out the parts.

Related reading

• How to invest in an Opportunity Zone, step by step
• Opportunity Zone tax benefits
• OZ 1.0 vs OZ 2.0
• When do Opportunity Zones expire?

Sources: 26 U.S.C. §1400Z-2; Treas. Reg. §1.1400Z2(c)-1; P.L. 119-21 §70421; IRS, Opportunity Zones FAQ; IRS, About Form 8997.

Not tax advice.