2026 OZ 2.0 Nomination Strategies & New Qualified Opportunity Zone Designations
By Frank Perdue, Audit Manager, Sherbert CPA, PC; fperdue@sherbertcpa.com
Background
The Opportunity Zone (OZ) program was created in 2017 under the Tax Cuts and Jobs Act. OZs are federally designated, economically distressed census tracts where investors can receive deferral of OZ capital gains for putting capital into local development projects via Opportunity Zone investments in Qualified Opportunity Zones (QOZs). Those initial QOZs were originally scheduled to sunset (expire) on December 31, 2028 and that OZ framework is referred to as “OZ 1.0”.
The OZ program was made permanent by the One Big Beautiful Bill Act (OBBBA), which was signed into law on July 4, 2025. The permanent OZ program created by the OBBBA is referred to as “OZ 2.0”. There are new QOZ eligibility criteria under OZ 2.0. As a result, there will be a period of overlap (January 1, 2027 through December 31, 2028) where both the OZ 1.0 and OZ 2.0 frameworks will apply. The following table summarizes what changed under OZ 2.0.
| Feature | OZ 1.0 | OZ 2.0 |
| Program life | Expiring | Permanent; redesignated every 10 years |
| Gain deferral | Fixed end date (12/31/2026) | Rolling 5-year deferral from date of investment |
| Basis step-up | 10% at 5 yrs / 15% at 7 yrs | 10% at 5 yrs (7-yr tier eliminated) |
| Rural projects | No special treatment | 30% step-up + 50% improvement threshold |
| Tract eligibility | Broader; contiguous-tract option | Tighter LIC test; contiguous option removed |
Rural emphasis matters, as the new Qualified Rural Opportunity Fund (QROF) triples the five-year step-up to 30% and cuts the substantial-improvement threshold from 100% to 50% of basis for property in a tract comprised entirely of a rural area. The reduced 50% threshold took effect immediately on July 4, 2025; the other OZ 2.0 investor benefits apply to amounts invested after December 31, 2026.
How the OZ 2.0 Nomination Process Works
The Treasury Department and the IRS issued Revenue Procedure 2026-14 on April 6, 2026, establishing the official nomination procedures and identifying eligible tracts. A summary of the process is as follows:
- Nominated by: The chief executive of each state, D.C., and the territories – in general, the governor.
- Eligible Population: 25,332 census tracts qualify as low-income communities under the new definition (based on 2020–2024 ACS data), of which 8,334 are entirely rural.
- Cap for Selection: A state may nominate up to 25% of its eligible Low-Income Community (LIC)’s (minimum of 25 tracts). Most states will have far fewer tracts to designate than in 2018.
- Nomination Method: Nominations are submitted through an online Treasury Nomination Tool; Treasury then certifies and designates the tracts.
The nomination process is iterative as governors may submit and revise nominations multiple times during a 90-day nomination window (see table below for details regarding the nomination window). It is important to note that early submissions are treated as received at the close of the 90-day window, not when first submitted, so no state benefits from being the first to submit nominations. This means community advocates, developers, and local officials theoretically have until the deadline to make the case for specific census tracts. Theoretically because it is possible that governors may choose to lock in their designations at an earlier date. If a state governor believes a census tract qualifies as a LIC but it doesn’t appear on the official IRS list, the state governor may still nominate that census tract if the nomination is accompanied by a detailed analysis, including current census-tract-level data, demonstrating a census tract satisfies the LIC requirements. See the following table for a list of important dates to be aware of.
| Date | Event |
| July 1, 2026 | 90-day nomination window opens |
| Sept. 28, 2026 | Nominations due (single 30-day extension available, to ~Oct. 28) |
| Late 2026 | Treasury certifies and publishes the final designated tracts |
| Jan. 1, 2027 | New OZ map and OZ 2.0 tax rules take effect (run through 2036) |
Between now and the opening of the nomination window, the Treasury Department will finalize its online Nomination Tool and reach out directly to each state governor with instructions.
What Makes a Strong Nomination from a Governor’s Perspective?
- Focus on census tracts at approximately 60% Area Median Income (AMI) by prioritizing 50-60% AMI with positive indicators (anchor institutions, recent investments, infrastructure) while still meeting the OZ 2.0 requirements.
- Governors and local officials who base nominations on projects that are backed by real deals, credible partners, and clear public benefits may attract capital more easily. Governors may want to target a more diverse pipeline.
- Use a regional approach. Coordinate nominations across jurisdictions to show shared priorities and a larger pipeline. Measurable outcome targets that governors are likely to favor include housing, job creation, downtown revitalization, brownfield reuse, small-business growth, infrastructure, and critical facilities.
Next Steps
Census tract boundaries are based on the 2020 decennial census map and fixed for the full 10-year designation period (January 1, 2027 – December 31, 2036). There are no mid-cycle redraws, no boundary adjustments, and no tract splits. We recommend the following next steps for our clients:
- Map your pipeline against the eligible-tract list. Cross-reference current and prospective project sites with the Rev. Proc. 2026-14 appendix (https://www.irs.gov/pub/irs-drop/rp-26-14-appendix.xlsx) to confirm eligibility and flag whether any sit in an entirely rural tract (where QROF benefits are materially larger).
- Engage your state’s OZ office now. Some states have public input periods for OZ 2.0 that are ending soon. For example, the deadline for submission to the state commerce department for North Carolina is June 21, 2026. Identify the agency leading nominations and its internal deadline and submission requirements. Tracts must be both in need and investment ready to compete for the limited slots.
- Build the case for your tract. Assemble site control, project plans, capital commitments, and community-benefit data into a concise advocacy package the state can act on.
- Coordinate gain timing. OZ 1.0 deferred gains are still recognized 12/31/2026 and cannot be rolled into OZ 2.0; new-program benefits attach to gains invested after 12/31/2026. Sequencing of dispositions and QOF funding should be planned deliberately. A deferral expiring at year-end is far less valuable for new investments made in 2026.
- Plan QOF/QROF structure and compliance early. The 90% asset test, working-capital safe harbor, and enhanced reporting (with steep penalties for noncompliance) reward structures designed before capital is deployed.
- Existing OZ fund portfolios should be stress-tested against the new eligible census tract list to determine the current OZ 1.0 zones that are fully eligible for OZ 2.0 redesignation.
Key Takeaways
The permanent OZ program offers significant capital gains benefits when properly structured. Careful planning by OZ fund managers and real estate developers is necessary to ensure optimal OZ structuring and compliance with the applicable framework(s). If properly structured, OZs can be an integral part of the capital stack for community development and economic development deals.
The Sherbert Group is happy to answer any questions and assist you with structuring your OZ deals.