The IRS recently released Notice 2026-40, providing transitional guidance as the Opportunity Zone program moves into its next phase. While much of the Notice focuses on technical rules, the practical implications are far more important for investors. We sat down with Jonathan McGuire, CPA, Partner at Aldrich CPAs + Advisors, to discuss what the guidance means for Qualified Opportunity Funds, developers, private equity sponsors, and high-net-worth investors preparing for 2026 and beyond.
Q: Put Notice 2026-40 into perspective. Is this a major turning point for Opportunity Zones?
Jonathan McGuire: I think it’s fair to say it’s an important milestone, but maybe not for the reason people expect.
The Notice doesn’t reinvent the Opportunity Zone program. It provides enough clarity for investors to start making decisions with more confidence with the revision of the program from 2025’s OBBBA. What many clients have been waiting for is direction on how the IRS intends to handle the transition into the next generation of the program.
Now we have that framework.
There are still proposed regulations to come, but investors don’t need to sit on the sidelines waiting for every answer. In fact, I’d argue the opposite. This is the time to start planning because some of the decisions made over the next several months won’t be easy to unwind later.
Q: Section 5 of the Notice has received a lot of attention. What should sponsors and developers understand about that rule?
Jonathan: Section 5 is one of the most important parts of the Notice for anyone with an active project in an existing Opportunity Zone.
The basic point is that after December 31, 2026, tangible property acquired for use in a previously designated Opportunity Zone generally will not qualify as Qualified Opportunity Zone Business Property unless it fits within a transition rule. That is a meaningful change because many existing projects may still be under construction, renovation, or development when 2027 begins.
The Notice provides two important paths for certain property to continue qualifying.
The first involves working capital safe harbor plans. If a project relies on that transition rule, the plan must be adopted on or before December 31, 2026, and the property acquisitions must be substantially consistent with that plan. In addition, the Qualified Opportunity Zone Business must have received at least 10% of the total estimated working capital assets designated under the plan by December 31, 2026, and must have spent at least 5% of those total estimated working capital assets by that same date. Amounts required to be spent under a binding agreement entered into before January 1, 2027, are treated as spent for purposes of that 5% requirement.
This change has prompted additional concern and commentary from the tax advisory community, as the zone expiration was previously scheduled for the end of 2028. It means sponsors should not wait until late 2026 to document the plan, fund the project, or begin execution. The paper trail matters, but so does actual progress.
The second path relates to ordinary-course replacement or modernization. If a business is replacing existing tangible property or modernizing property necessary to continue operations, that property may still qualify if the other requirements are met. But the Notice draws a line between maintaining or modernizing an existing business and expanding into new property or a new line of business.
A roof replacement, HVAC upgrade, or modernization needed to keep a building operating may be treated differently from the acquisition of a new building to expand capacity. For developers, sponsors, and fund managers, Section 5 turns project management into tax compliance. Construction timelines, draw schedules, binding contracts, capital calls, and written plans all need to be reviewed before year-end 2026.
Q: What’s the first conversation you’re having with existing Opportunity Zone investors?
Jonathan: It usually isn’t about tax calculations; it’s about preparedness.
A lot of investors understandably focus on the amount of gain they’ll recognize at the end of 2026. That’s certainly important. But the conversation quickly shifts to something more practical: How are we going to pay that tax?
Many investors have held these assets for years. The value may have changed significantly, but that doesn’t necessarily mean they’ve generated cash to cover the tax liability. That’s why we’re encouraging clients to think about liquidity well before year-end, not after.
At the same time, we’re reviewing basis schedules, original deferral elections, ownership records, and valuations to make sure there aren’t any surprises. Those aren’t glamorous conversations, but they’re the ones that tend to make the biggest difference.
Q: Some investors are wondering if the 2026 gain can simply be rolled into another Opportunity Zone investment. Can they?
Jonathan: That’s probably one of the biggest misconceptions we’re hearing.
Notice 2026-40 makes it clear that the deferred gain recognized at the end of 2026 generally can’t be deferred again through another Qualified Opportunity Fund under either the existing rules or the new framework.
That doesn’t mean the tax benefits disappear. If you’ve held your investment long enough and continue to meet the program’s requirements, the potential exclusion of future appreciation after a 10-year holding period remains a significant benefit. But investors need to separate those two concepts. The 2026 recognition event is one conversation. The long-term appreciation benefit is another.
Q: How does the guidance change the conversation for private equity sponsors and fund managers?
Jonathan: Sponsors have a lot to think about because they’re balancing two priorities at once.
First, they need to continue operating successful real estate projects. Second, they have to ensure those projects continue satisfying the Opportunity Zone requirements as the rules evolve.
The Notice provides welcome direction around working capital plans and certain property acquired after 2026 for projects in legacy Opportunity Zones. That’s helpful, but it also means fund managers should revisit construction schedules, acquisition timelines, capital calls, and investor communications.
Tax strategy should support the business plan, not dictate it. However, when timing becomes part of the qualification rules, operational and tax planning have to happen together. One can’t really succeed without the other.
Q: What are developers and real estate investors asking you right now?
Jonathan: Most of the questions revolve around existing projects.
Can we finish construction under the transition rules? Does this renovation still qualify? What about replacement property? What if we’re expanding the business?
Those are good questions because the answers aren’t always intuitive.
The Notice draws important distinctions between maintaining an existing business and expanding one. On paper, those concepts can seem similar. In practice, they may lead to different tax outcomes.
That’s why we’re encouraging clients not to make assumptions based on prior guidance. Every project has its own timeline, financing structure, ownership group, and capital plan. Those details matter.
Q: Beginning in 2027, the Opportunity Zone program changes. Should investors still be interested?
Jonathan: Absolutely.
The program is evolving, not disappearing.
Beginning in 2027, investors will generally be looking at a five-year deferral period rather than the structure they’ve become accustomed to over the past several years. There are also new basis adjustments, along with enhanced incentives for qualifying rural Opportunity Zone investments.
That’s a meaningful change, particularly for investors who are already evaluating future capital gains.
I don’t think the question is whether Opportunity Zones still make sense. The better question is whether they make sense within your overall investment strategy. That’s always been the right way to evaluate these opportunities.
Q: Rural Opportunity Zones seem to be receiving a lot of attention. Why?
Jonathan: They’re becoming more compelling for certain investors.
Earlier IRS guidance lowered the substantial improvement threshold for qualifying rural Opportunity Zone property, which can significantly improve the economics of redevelopment projects. Notice 2026-40 builds on that by confirming enhanced basis adjustments for investments made through Qualified Rural Opportunity Funds beginning in 2027.
Those are meaningful incentives.
At the same time, taxes shouldn’t drive every investment decision. Rural markets come with their own opportunities and challenges. Investors still need to evaluate population trends, infrastructure, financing, demand, labor availability, and long-term exit strategies. The tax benefit should strengthen a good investment. It shouldn’t be the reason you make one.
Q: For high-net-worth investors and family offices, where should the focus be?
Jonathan: I’d say perspective matters.
Opportunity Zones are one piece of a much larger financial picture.
For some clients, the priority is preparing for the 2026 recognition event. Others are thinking about future liquidity events, business sales, or appreciated investments that could generate capital gains after 2026.
Those conversations naturally expand into estate planning, charitable giving, investment management, and long-term wealth strategy. That’s one advantage of working with an integrated advisory team. We can evaluate Opportunity Zone planning alongside broader tax, business, and wealth objectives rather than treating it as a stand-alone decision. Aldrich’s integrated approach brings together tax planning, valuation, transaction advisory, business consulting, and wealth management, so clients can evaluate opportunities from multiple perspectives.
Q: If you could leave investors with one piece of advice, what would it be?
Jonathan: Don’t mistake uncertainty for a reason to wait.
There’s still work to be done before additional regulations arrive, but Notice 2026-40 gives investors something they’ve been asking for: a road map.
The clients who are likely to benefit the most won’t necessarily be the ones chasing every tax incentive. They’ll be the ones asking thoughtful questions now, modeling different scenarios, and making decisions that fit their investment goals and their broader financial picture.
Opportunity Zones have always rewarded long-term thinking. If anything, this latest guidance reinforces that idea.
Planning Ahead for 2026
Jonathan recommends that investors begin reviewing:
- Existing Qualified Opportunity Fund investments and deferred gains
- Expected liquidity needs related to the 2026 recognition event
- Valuation and basis documentation
- Working capital plans for active projects
- Planned acquisitions or developments that may extend beyond 2026
- The role Opportunity Zone investments play within broader tax and wealth planning
