The IRS has released Notice 2026-40, which provides transition guidance for the Opportunity Zone rules as amended by the One Big Beautiful Bill Act. The Department of the Treasury and the IRS have indicated that forthcoming proposed regulations are expected to include rules similar to those described in the Notice.[1]

For projects in previously designated Opportunity Zones, the most immediate practical issue addressed by the Notice is whether a Qualified Opportunity Fund (QOF) or Qualified Opportunity Zone Business (QOZB) may continue to acquire property in those zones after December 31, 2026.

The Notice clarifies an important limitation for projects in previously designated Opportunity Zones. Under the amended statute, tangible property acquired after 2026 generally must be acquired after the “applicable start date” for the relevant Opportunity Zone. Because previously designated Opportunity Zones were designated before that framework was enacted, property acquired after 2026 for use in those zones generally will not qualify as Qualified Opportunity Zone Business Property unless an exception applies.

Previously designated Puerto Rico Opportunity Zones expire on December 31, 2027. All other previously designated Opportunity Zones expire on December 31, 2028.

Transition Rules for Previously Designated Opportunity Zones

Notice 2026-40 provides two principal paths for post-2026 acquisitions in previously designated Opportunity Zones.

I. Working Capital Safe Harbor Plan

Property acquired after 2026 may continue to qualify if it is acquired under a written working capital safe harbor plan adopted on or before December 31, 2026. The plan must designate working capital assets in writing for the development of a trade or business in the QOZ, and must include a written schedule consistent with the ordinary start-up of a trade or business under which those assets are spent within 31 months of receipt. To rely on this transition rule, the QOZB must receive at least 10% of the total estimated working capital assets under the plan and expend at least 5% of those assets by December 31, 2026. Amounts required to be spent under a binding agreement entered into before January 1, 2027, may count toward the 5% requirement.

The working capital plan rule is also important for post-2026 QOF investments into QOZBs. The Notice confirms that post-2026 eligible gain may still be invested in a QOF, and provides a path for that capital to support a project in a previously designated Opportunity Zone where the QOF/QOZB investment and related property acquisitions are made pursuant to a qualifying written working capital plan. Stock or partnership interests acquired after 2026 pursuant to such a plan may be treated as acquired after the required “applicable date” for purposes of the QOZ stock and QOZ partnership interest rules.

This rule will be especially relevant for projects with multi-year development, acquisition, construction, or improvement timelines that will continue after 2026. Sponsors should confirm that the written plan, budget, schedule, funding, and contracts connect the post-2026 activity to the pre-2027 plan.

Examples

Example 1: Project with a qualifying working capital plan. A QOF forms a QOZB to develop a mixed-use project in a previously designated Opportunity Zone. Before December 31, 2026, the QOZB adopts a written master plan for commercial and residential development, receives and spends the required working capital amounts, and completes the initial phase of the project. The residential phase continues after 2026 in accordance with the original plan. In that case, post-2026 property acquisitions made in a manner substantially consistent with the plan may continue to qualify. The Notice also indicates that additional post-2026 capital may support the project where the capital is needed to complete work included in the original plan.

Example 2: Post-2026 expansion without a qualifying plan. A QOZB operates a manufacturing facility in a previously designated Opportunity Zone and, after 2026, acquires a new warehouse on adjacent land to expand capacity for a new product. The property is not in a newly designated Opportunity Zone, is not acquired under a qualifying written working capital plan, and is acquired for business expansion rather than ordinary-course replacement or modernization. In that case, the new warehouse generally will not qualify as Qualified Opportunity Zone Business Property merely because it is located in a previously designated Opportunity Zone.

II. Ordinary Course Replacement Exception

Property acquired after 2026 may qualify if it is acquired in the ordinary course of business to replace or modernize existing tangible business property. The Notice indicates that this can include replacement or modernization needed to continue current operations. Examples include apartment unit renovations when tenants vacate (window replacements, appliances, fixtures, cabinetry, and flooring) and restaurant kitchen modernization (new ventilation systems for energy efficiency and updated point-of-sale systems). It does not extend to property acquired for business expansion or a move into a new line of business.

The Notice also provides relief for certain compliance tests after the designation period for a previously designated Opportunity Zone expires. Specifically, qualifying property acquired before expiration, or under one of the transition rules, may continue to treat the expired zone as an Opportunity Zone for purposes of both (i) the “substantially all use” requirement of the QOZBP definition under § 1400Z-2(d)(2)(D)(i)(III), and (ii) the QOZB gross income and intangible property tests under § 1400Z-2(d)(3)(A)(ii). This relief extends through December 31, 2047.

Planning Considerations

Projects in previously designated Opportunity Zones should be reviewed for planned post-2026 acquisitions and capital contributions. Particular attention should be given to whether a working capital safe harbor plan should be adopted or updated before December 31, 2026, whether the 10% funding and 5% expenditure thresholds can be met, and whether any post-2026 work is properly characterized as ordinary-course replacement or modernization rather than expansion.

Bottom Line

While Notice 2026-40 is not final regulation, it is expected to form the basis for forthcoming proposed regulations. Opportunity Zone projects that expect to acquire property after 2026 in previously designated Opportunity Zones should treat the Notice as a planning priority and document their plans, commitments, expenditures, and business purpose before the end of 2026. Those with upcoming Opportunity Zone projects should consider project timing and the need for a working capital plan, if located in a previously designated Opportunity Zone.

Winthrop & Weinstine will continue to monitor Opportunity Zone guidance as it is released. For more information, please contact the attorneys mentioned within this alert or your regular Winthrop attorney.

[1] Notice 2026-40 also addresses several investor-level transition rules that are not the primary focus of this alert. Among other items, the Notice provides that taxpayers holding qualifying QOF investments through December 31, 2026 generally must include remaining deferred gain at that time, but may remain eligible for the 10-year basis step-up election on a later sale if the applicable requirements are satisfied. The Notice also provides that this deemed included gain cannot itself be re-deferred. Separately, eligible gain realized on or before December 31, 2026 may still be deferred if timely invested in a QOF after December 31, 2026, and post-2026 QOF investments are generally subject to the amended five-year gain inclusion rule and related basis step-up rules.

June 25, 2026