Summary: IRS Notice 2026-40 provides transition guidance for Opportunity Zone investments as the program moves into its post-2026 framework. Existing projects may continue to qualify for certain tax benefits, but developers should carefully evaluate post-2026 property acquisitions, working capital safe harbor plans, and documentation requirements. The guidance also confirms that most investors must recognize deferred gain in 2026, making proactive planning essential.

The IRS recently issued Notice 2026-40, providing important transitional guidance for Qualified Opportunity Zone (QOZ) investments. While the notice does not replace the need for future regulations, it provides taxpayers with an insight into how the U.S. Department of Treasury and the IRS intend to administer the QOZ rules as the program transitions from the original regime (QOZ 1.0) to the new, post-2026 framework (QOZ 2.0).

For real estate developers, the notice is especially important because it answers a practical question: What might happen to existing QOZ projects after 2026? The guidance generally allows properly structured projects in QOZ 1.0 to continue qualifying, including for purposes of the 10-year appreciation exclusion. But that relief is not unlimited. Developers planning additional land acquisitions, new phases, major expansions, or other post-2026 property purchases will need to confirm that those activities fit within the notice’s transition rules.

In short, existing projects received helpful relief, but developers need to be very careful with acquisitions, expansions, working capital plans, and documentation before the end of 2026.

Investor Considerations for Existing Opportunity Zone Projects After 2026

The notice does not shut the door on new investments into QOZ 1.0 projects after 2026. A taxpayer may invest eligible gain into a QOF on or after Jan. 1, 2027, and still receive QOZ benefits even if the underlying project is located in a previously designated QOZ. For real estate developers, this is particularly relevant where a project in an original QOZ has already acquired qualifying property, is operating under a valid working capital safe harbor plan, or is continuing to hold property that qualifies under the transition guidance.

In other words, QOZ 1.0 status alone is not fatal to new 2027 investor capital, but developers and investors will need to confirm that the underlying property and business activity continue to qualify under the notice’s transition rules (outlined below).

Post-2026 Property Acquisitions in Previously Designated Opportunity Zones

The most important part of Notice 2026-40 for real estate developers involves tangible property acquired after Dec. 31, 2026.

Under the new statutory framework, property generally must be acquired after the “applicable start date” of the QOZ. For newly designated QOZs, the concept is straightforward. But previously designated zones do not have an applicable start date because they were designated before the statutory change.

As a result, tangible property acquired after Dec. 31, 2026, for use in a QOZ 1.0 zone generally will not qualify as QOZ business property unless a transition rule exception applies.

Many developers have projects in old QOZ tracts that may not be re-designated as QOZs under the new regime. For those projects, the ability to continue treating future property acquisitions as qualified property may depend on whether the acquisition falls within one of the notice’s transition rule exceptions:

• Transition Rule No. 1: Working Capital Safe Harbor Plans

Notice 2026-40 provides relief for property acquired after Dec. 31, 2026, pursuant to a qualifying written working capital safe harbor plan.

This relief is particularly important for real estate projects that are already underway but will continue into 2027 or later. To qualify, the project must have a written working capital plan adopted on or before Dec. 31, 2026. The property acquisitions must be substantially consistent with that plan. In addition, by Dec. 31, 2026, the QOZ business (QOZB) must have received at least 10% of the total estimated working capital assets designated in the plan and must have expended at least 5% of the total estimated working capital assets. Amounts required to be spent under a binding agreement entered into before Jan. 1, 2027, are treated as expended for this purpose.

For developers, this means the working capital plan cannot be an after-the-fact cleanup document. It needs to be detailed, contemporaneous, and consistent with the actual project.

• Transition Rule No. 2: Ordinary-Course Replacement Property

The notice also provides relief for tangible property acquired after Dec. 31, 2026, in the ordinary course of business to replace existing tangible business property in a previously designated QOZ. This includes replacement or modernization of property necessary to continue operations.

This rule should be helpful for stabilized real estate assets. For example, an apartment project in an old QOZ may need to replace appliances, flooring, cabinetry, windows, HVAC components, or other building systems as tenants move out or as the property ages. Those types of ordinary-course replacements may continue to qualify. However, the notice draws a line between replacement and expansion. Property acquired to expand a business or transition into a new business is not covered by this ordinary-course replacement rule.

Existing Investors Still Need To Plan for 2026 Gain Recognition

Notice 2026-40 confirms that taxpayers with pre-2027 QOF investments generally must recognize their remaining deferred gain in the taxable year that includes Dec. 31, 2026. The notice also indicates that this deemed inclusion cannot be rolled into a new QOF deferral election.

That may create cash flow issues for investors. Developers and fund sponsors should be communicating with investors now, so they understand the timing of the 2026 income inclusion and estimated tax considerations.

Key Takeaways for Real Estate Developers

Notice 2026-40 is largely helpful for existing QOZ projects. The guidance protects many projects already in motion, particularly those with well-documented working capital plans and ordinary-course replacement needs. At the same time, it limits the ability to use old QOZ designations for new post-2026 acquisitions and expansions.

For real estate developers: Review project plans now, clean up documentation before the end of 2026, and do not assume future acquisitions in a previously designated QOZ will qualify. The projects most likely to benefit from this guidance will be the ones that can show they were planned, funded, and executed in a manner consistent with the transition rules.

How KSM Can Help

• QOZ project diagnostic review: KSM can review existing QOF and QOZB structures, project timelines, working capital safe harbor plans, capital deployment schedules, and investor documentation to identify potential risks under the new transition guidance.
• Working capital safe harbor review and refresh: For projects expected to continue beyond 2026, KSM can help determine whether existing written plans are specific enough to support post-2026 acquisitions and whether the 10% receipt and 5% expenditure requirements are on track to be satisfied.
• Developer transaction planning: For phased developments, expansion opportunities, adjacent parcel acquisitions, refinancings, and major capital improvement projects, KSM can help evaluate whether the contemplated activity fits within the transition rules or requires a different planning approach.
• Investor communication and 2026 tax planning: KSM can help fund sponsors explain the Dec. 31, 2026, gain recognition event to investors, and model potential tax liabilities.

The transition to the post-2026 Opportunity Zone framework creates new planning considerations for developers, fund sponsors, and investors alike. Taking action now to review project timelines, working capital plans, acquisition strategies, and investor communications can help preserve valuable tax benefits and reduce uncertainty as the new rules take effect.

To discuss how the QOZ transition rules may affect your projects or investments, or to discuss other QOZ-related matters, contact your KSM advisor or fill out the form below.

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