I have a client with high capital gains. How do they defer tax without investing in property?

Through an operating business. The gain goes into a fund, and the fund invests in a company that runs its business in a zone. The business can lease its space. It has to pass the QOZB tests, but it does not have to own real estate.

If a company working from our QOZB wants to become a QOZB itself, does it need its own QOF?

Yes, if its owners want the capital gains benefit. The gain has to go into a fund, and that fund has to buy a newly issued interest in the company for cash. Leasing space in the zone can help the company pass its own QOZB tests.

An existing business in an Opportunity Zone wants to move into a building owned by an OZ fund. How can it restructure?

It can lease space in the fund's building at a market rate and qualify as a QOZB on its own, if it passes the tests. For its owners to get the tax benefit, they need their own fund that invests capital gains into the business for newly issued equity.

How to Exit an Opportunity Zone Business Tax-Free

Can I sell an Opportunity Zone business tax-free?

Yes, if the structure and the hold are right. Hold a qualifying fund investment at least ten years and you can elect to step its basis up to fair market value when you sell, so the growth is free of federal capital gains tax. If the fund is a partnership or S corporation, you can also elect to exclude the gain when the fund sells its stake in the business. The business has to keep passing the QOZB tests the whole time.

Reviewed by Ashley Tison, attorneyUpdated October 2026How we review answers

A business program first

Real estate gets the headlines, but the rules were written for businesses. As Ashley puts it, "OZs are not a real estate program. They're a business program that real estate people found first." An operating company that does its work in a zone can be the QOZB under a fund. Hold that fund interest ten years and, in Ashley's words, the growth "comes out completely tax free, not deferred, not reduced, gone." That is the federal result for a compliant fund after ten years, with the election made. State tax, inventory sales, and C-corporation fund asset sales are different.

How an operating business fits

Your capital gain goes into a fund. The fund buys newly issued stock or a newly issued partnership interest in the business for cash. The business then has to pass the QOZB tests:

At least 70% of its owned or leased tangible property is Opportunity Zone business property.
At least 50% of its gross income comes from active business in a zone. That can be shown by where the hours are worked, where service dollars are paid, or where the property and management sit. Ashley's shorthand: "Your 50% gross income test is based upon where your employees are, not where your revenue comes from." Where the work and management happen counts, not where customers are. Headcount is one of four ways to pass.
A substantial part of its intangible property is used in the zone business.
Less than 5% nonqualified financial property, with a working capital plan for cash it is spending.
It is not a golf course, country club, massage parlor, hot tub or suntan facility, racetrack or gambling business, or liquor store.

A business can lease its space in a zone instead of owning it, as long as the lease is at market rate. Ashley likes separating a property company from the operating company for the same reason.

The ways out

Sell your fund interest. After ten years, you elect to treat your basis as its fair market value, so there is no federal capital gain on the growth. For a fund taxed as a partnership, the regulations also step up the fund's and lower-tier partnerships' asset basis, so depreciation recapture goes away too.
Have the fund sell. If the fund is a partnership or S corporation, you can elect to exclude your share of gains and losses when the fund, or a partnership it owns, sells property, including its interest in the business. Inventory sold in the ordinary course is not covered. The regulations treat the proceeds as distributed to you and put back in as a non-qualifying investment.
If the business is a corporation, the clean route is a sale of the fund interest or of the fund's stock in the business. An asset sale inside a corporation is outside the fund-level election.

The election is made on a timely filed return for the year of the sale. See does the step-up eliminate recapture?

What has to stay true for ten years

The fund passes its 90% test twice a year and files Form 8996 each year.
The business qualifies as a QOZB for substantially all of the time the fund holds it.
You do not have an inclusion event on that interest, and you file Form 8997 every year.
The new reporting is filed, with the business sending its data to the fund.

If the business is in an original zone that is not on the new map, Notice 2026-40 says the IRS intends to propose rules that let a QOZB that began active business there before the zone expired keep treating it as a zone for the gross income and intangible tests through December 31, 2047. New property bought after 2026 in that tract generally needs a qualifying working capital plan or must be an ordinary-course replacement.

These rules come from IRS Notice 2026-40, which describes regulations the IRS plans to propose. Confirm the current status with your advisor before acting.

Time limits

For OZ 1.0 money, protection for the ten-year election runs through sales on December 31, 2047. For OZ 2.0 money, you can hold as long as you like, but if you hold past 30 years, the value is frozen at the 30th anniversary.

Planning an exit starts years ahead, with the records that prove each test. Our services cover structure and compliance for operating businesses. Start with the Blueprint or a 15-minute call.