As the Opportunity Zone (OZ) program approaches a key transition period, recent developments are beginning to address one of the most significant areas of uncertainty for investors and fund managers: how in-process OZ 1.0 projects will be treated as existing census tract designations expire.
The Novogradac Real Estate Working Group has submitted draft recommendations to the U.S. Treasury outlining a potential framework for transitioning from OZ 1.0 to OZ 2.0. While not yet formal guidance, these proposals provide helpful insight into how Treasury and the IRS may approach these issues.
The federal Opportunity Zone program became effective on January 1, 2018, with more than 8,700 designated census tracts eligible for investment through December 31, 2028. Looking ahead:
This transition has created uncertainty around how projects that are underway, but not yet completed, will be treated once OZ 1.0 designations lapse.
To address this uncertainty, the Novogradac Real Estate Working Group has proposed a “grandfathering” safe harbor designed to allow certain OZ 1.0 investments to continue qualifying beyond 2028.
The proposal would allow a qualifying business located in an expired OZ 1.0 census tract to be treated as operating within a “Grandfathered Qualified Opportunity Zone”, maintaining compliance status through 2047.
To qualify for this treatment, an entity must, by December 31, 2028:
The written QOZB plan remains a central requirement. It must outline the intended development of a real estate project or operating business and align with the Working Capital Safe Harbor (WCSH) rules. This allows the business to deploy working capital over:
This framework is particularly important for projects initiated toward the end of the OZ 1.0 period.
For example, an investment made in late 2027 could still deploy capital into Qualified Opportunity Zone Business Property (QOZBP) located in an expiring OZ 1.0 census tract as late as the third quarter of 2030, even if the underlying census tract designation expires in 2028.
The proposal also contemplates that key compliance requirements would not be considered failed solely due to the expiration of the census tract designation, including:
Under the proposed framework, grandfathered status would not be automatic or permanent. An entity may lose eligibility if it:
As a result, clear and contemporaneous documentation of the intended use of funds and project scope will be critical.
While formal guidance has not yet been issued, the proposed framework highlights several considerations for those currently evaluating or managing OZ investments:
For example, an investor contributing $1,000,000 to a QOF in late 2028 for a project expected to be completed in 2031 may still qualify under a “permitted entity” concept, provided the entity maintains sufficient working capital and adopts a written schedule for deploying those funds within the applicable WCSH period.
As the transition from OZ 1.0 to OZ 2.0 continues to take shape, additional guidance from the Treasury and the IRS will be critical in determining how these rules are ultimately applied.
In the meantime, investors and fund managers should continue to monitor developments and evaluate how potential grandfathering provisions may impact current and planned investments.
For more information on the OZ Program, your gain eligibility, and the transitioning rules from OZ 1.0 to 2.0, please feel free to contact our OZ Team and our OZ resources:
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