OZ 1.0 vs. OZ 2.0: Invest Now or Wait?

With Opportunity Zones now permanent and OZ 2.0 set to launch on January 1, 2027, investors sitting on capital gains face a critical decision: deploy capital into a QOF now under OZ 1.0, or wait for the stronger benefits of the new regime.

Recorded live at OZ Pitch Day, this panel breaks down the trade-offs — including valuation discounts, the 5-year deferral, basis step-ups, and strategies for keeping your options open. Catherine Lyons of the Economic Innovation Group, Blake Christian of HCVT, and Jason Watkins of Novogradac & Company join host Jimmy Atkinson to help investors make the call.

Guests

• Blake Christian on LinkedIn
• Catherine Lyons on LinkedIn
• Jason Watkins on LinkedIn

Featured On This Episode

• EIG’s OZ Guide for Governors and Mayors
• Novogradac’s State Nomination Process Tracker
• OZ 2.0 Eligibility Map

About The Opportunity Zones Podcast

Hosted by OpportunityZones.com founder Jimmy Atkinson, The Opportunity Zones Podcast features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in the Opportunity Zones industry.

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Episode Summary

Recorded live during OZ Pitch Day, this panel brings together three Opportunity Zone industry leaders to tackle one of the most pressing questions facing investors today: should you invest in OZ 1.0 now, or wait for OZ 2.0? Host Jimmy Atkinson is joined by Catherine Lyons, Senior Director of Policy and Coalitions at the Economic Innovation Group; Jason Watkins, Partner in the Metro Atlanta office of Novogradac & Company and Chairman of the Novogradac Opportunity Zones Working Group; and Blake Christian, Tax Partner in the Park City, Utah office of HCVT CPAs.

The OZ 1.0 and OZ 2.0 Framework

Jimmy opens by framing the central issue: Opportunity Zones are now permanent following the One Big Beautiful Bill Act from last summer, which introduced OZ 2.0. OZ 1.0 benefits remain available for investors who defer a gain into a Qualified Opportunity Fund on or before December 31, 2026 — but with no additional deferral period, meaning taxes on that deferred gain come due at the end of this year. Investors who defer a gain on or after January 1, 2027 receive OZ 2.0 treatment, which includes a 5-year deferral period. OZ 2.0 also provides a 10% step-up in basis after the 5-year period for non-rural investments, and 30% for investments in rural Opportunity Zones.

The OZ 2.0 Designation Process

Catherine Lyons explains that states have already begun their OZ 2.0 selection processes, but are doing so without the full picture — Treasury has yet to publish the definitive list of eligible census tracts. EIG, Novogradac, and Jimmy’s group have each published maps based on the latest available census data from late January that reflect what they believe will be the eligible tracts under the new criteria. All three maps also include rural overlays. The new criteria are “a bit more narrow and a bit more targeted” than OZ 1.0, and are expected to result in about 20% fewer Opportunity Zones under 2.0 than currently exist. Approximately 25,000 census tracts are estimated to be eligible for designation, out of roughly 86,000 nationwide, with about 6,500 ultimately expected to be designated.

The designation window opens July 1, 2026, when governors and territorial leaders can begin submitting their selections to Treasury. They have 90 days to do so, with a possible 30-day extension, putting the final outer deadline around the end of October. Treasury then has the remainder of the year to certify the map, with the goal of having it fully live and active for investment on January 1, 2027.

Catherine also emphasizes a best practice from OZ 1.0: states should publish their draft selections for public comment before submitting to Treasury, as states that did this in the first round “ended up with a much better map.”

Jason adds that Novogradac has begun aggregating state-by-state nomination process information — including links to sites where local jurisdictions can make recommendations — and has published this resource on their website.

The Public Comment Period

Jason clarifies a question from the audience about a Treasury email referencing a public comment period. The comment period is on the nomination tool — specifically, the CDFI Fund’s Awards Management Information System (AMIS) — that chief executive officers of each state and territory will use to submit their census tract nominations. Catherine notes that comment period is open through May 5th. At this stage, the public is commenting on the tool itself, not on actual nominated census tracts.

Rural Opportunity Zones

Catherine explains that the definition of “rural” in the statute is borrowed from the U.S. Department of Agriculture, and is described as “more inclusive.” Under the current OZ 1.0 map, approximately 38% of all Opportunity Zone census tracts are rural. Treasury published guidance at the end of September on what qualifies as a rural OZ under the current map, prompted by the immediate availability of the lowered substantial improvement threshold — reduced to 50% from 100% for rural zones.

For OZ 2.0, the same definition is expected to apply. Because rural areas aren’t delineated by census tracts, there is some geographic complexity, but the mapping groups have developed overlays to categorize tracts effectively. States have full flexibility in how many rural zones they choose to designate — there is no required set-aside or percentage mandated by the federal government or the statute. Catherine notes there has been “an increased interest in thinking through rural strategies” as states begin their selection processes, driven by the stronger benefits available for rural investments.

Invest Now or Wait? The Panelists Weigh In

Blake Christian says the answer “really depends on the facts of the particular taxpayer.” For investors with 2025 K-1 gains or late-2025 personally held asset gains, OZ 1.0 is the only option. However, Blake notes there is still meaningful tax savings available through valuation at the December 31, 2026 deferral date. Because investors recognize the lower of fair market value or the deferred gain, and because many funds involve minority interests, early-stage construction, or not-yet-stabilized operating businesses, discounts of 30% to 50% on immature projects are realistic. Blake says minority interest discounts alone “pretty much” warrant a 30% discount that the IRS is unlikely to challenge.

For investors with gains triggered on or after July 6, 2026 (individually, not through a K-1), Blake explains that the 180-day investment window can carry into early January 2027 — making OZ 2.0 treatment possible. He recommends using July 10 as the practical earliest trigger date to allow for bank closures and weekends around New Year’s Day, with the goal of funding the QOF no earlier than January 4, 2027.

Jason Watkins quantifies the value of waiting. Under OZ 2.0, investors get a 5-year deferral before taxes become due, plus the 10% or 30% basis step-up. He notes that based on Novogradac’s modeling, “probably over half the value of an Opportunity Zone investment is in that 10-year hold” — which is available whether you invest this year or next. He concludes that if a deal is available now and looks strong, or if an investor is time-constrained by how and when their gain was realized, they should invest now rather than wait.

Blake ranks the three OZ benefits in order of value: the 10-year tax-free gain is the most valuable; the 5-year deferral is the second most valuable — illustrating with a $5 million gain at a 20% tax rate, where even a 5% return on the deferred tax dollars over 5 years generates an additional $250,000 of value; and the basis step-up is the least valuable of the three at the federal level, with the notable exception of the 30% rural basis adjustment under OZ 2.0, which Blake describes as “real money.”

OZ 2.0 Dollars Flowing Into OZ 1.0 Tracts

A key open question discussed by all three panelists is whether OZ 2.0 investor dollars — gains deferred on or after January 1, 2027 — can flow into OZ 1.0 census tracts that do not get redesignated under OZ 2.0. Jason says practitioners broadly assume this will be allowed, based on legislative intent to give OZ 1.0 tracts a full 10 years of investment activity, consistent with future designation cycles. The Novogradac Opportunity Zones Working Group has submitted a recommendation letter to Treasury and followed up with meetings to request guidance on this issue as soon as possible. Catherine notes that an earlier version of the bill would have cut off OZ 1.0 zones at 2026, but that provision was removed — implying Congressional intent to keep both maps active through the two-year transition period ending in 2028. Both she and Jason stress that Treasury guidance “can’t come soon enough.”

Strategies for Maximizing Flexibility

Blake discusses two practical strategies for investors who want to preserve the option to invest under OZ 2.0. First, investors holding an asset individually can contribute it to a partnership and sell out of the partnership to obtain K-1 treatment — extending the 180-day investment window to as late as September 2027. Second, for investors who don’t want to set up a holding entity, selling an asset on an installment sale basis (which requires payments in two different years) allows the first payment to be treated as received on December 31, 2026, and pushes the gain to OZ 2.0 treatment. Blake notes this strategy does not work for publicly traded stock.

On the use of captive QOF structures, Blake explains that his firm manages roughly 250 funds, the majority of which are “captive OZ funds” where investors park their capital in their own personal QOF and then deploy into a project when the right opportunity arises — either investing down into a QOZB of a sponsoring QOF, or contributing directly to a third-party QOF. Jason adds an important caveat: the investor cannot have a regarded entity between themselves and the fund, but a disregarded entity — something wholly owned, or potentially a trust — would be permissible.

Total OZ Investment to Date

In response to an audience question, Jason reports that Novogradac’s latest survey shows over $43 billion invested in Qualified Opportunity Funds. He notes that historically, Novogradac’s survey has represented approximately one-third of actual IRS-reported investment totals, leading to an estimated $120 to $130 billion in total gains invested in Qualified Opportunity Funds to date. The most recent IRS data available is from 2022 or 2023.