Opportunity Zones for Business Owners: IRC 1400Z-2 Capital Gains Deferral, Reduction, and Permanent Exclusion

The Qualified Opportunity Zone program was created by the Tax Cuts and Jobs Act of 2017 to incentivize investment in economically distressed communities by providing three tax benefits to investors who reinvest capital gains into Qualified Opportunity Funds (QOFs): (1) temporary deferral of the original capital gain until the earlier of the sale of the QOF investment or December 31, 2026 (under IRC 1400Z-2(b)), (2) basis step-up incentives that reduced the deferred gain by 10% (5-year hold) and 15% (7-year hold), and (3) permanent exclusion of all appreciation on the QOF investment if held for at least 10 years (IRC 1400Z-2(c)). The basis step-up incentives have largely expired because the QOZ designations were made in 2018 and the required 5-year and 7-year holding periods needed to be met before the December 31, 2026 recognition date. However, the permanent exclusion on appreciation (the third and most valuable benefit) remains available for any QOF investment held for 10 or more years. For amounts invested after December 31, 2026, P.L. 119-21 replaces the fixed 2026 date with a rolling 5-year deferral and a 10% basis step-up at 5 years (30% for a qualified rural opportunity fund).

How do Opportunity Zones work for business owners?

Can I offset capital gains with capital losses from other investments?

Yes. Capital losses first offset capital gains of the same type (short-term losses against short-term gains, long-term against long-term), then any remaining net loss offsets gains of the other type. If net capital losses exceed capital gains, you can deduct up to $3,000 of the excess against ordinary income ($1,500 if married filing separately). Unused losses carry forward indefinitely to future tax years, maintaining their character (short-term or long-term). The wash sale rule (IRC 1091) prevents you from claiming a loss if you repurchase substantially identical securities within 30 days before or after the sale. Tax-loss harvesting before year-end is a common strategy to realize losses that offset gains elsewhere in the portfolio.

Related guides:

• Qualified Opportunity Zone Investments: Capital Gains Deferral and Exclusion …
• Qualified Opportunity Zones for Business Owners: Deferring and Reducing Capit…
• Like-Kind Exchange (IRC 1031) for Small Business Real Estate

What does a QOZ defer when you sell a business?

Only the gain you put into a qualified opportunity fund within 180 days of the sale. A business sale usually mixes ordinary recapture, taxed at up to 37%, with long-term gain on assets held more than one year, taxed at 0%, 15% or 20% (20% starts above $600,050 of 2025 taxable income for joint filers). Under current rules, invested gain comes back on the earlier of selling the fund interest or December 31, 2026.

The 3.8% net investment income tax may not apply at all to an owner who actively ran the business, since gain on property held in a non-passive trade or business is excluded. For S corporation or partnership interests, the gain counts only as far as it would if the entity sold its assets at fair market value. For fund investments made after December 31, 2026, the deferral runs five years from the investment instead of ending on a fixed date.

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.