Driftwood Capital
Opportunity Zones were created in 2017 as part of the Tax Cuts and Jobs Act to help direct private capital into underserved communities. Since the program’s inception, Opportunity Zone investments have channeled billions of dollars into real estate developments and operating businesses across the country, according to the Novogradac QOF Snapshot1. In 2025, the program was made permanent, as the result of the passage of the One Big Beautiful Bill Act (OBBBA).
The following is a general overview of how Opportunity Zone (OZ) investing works.
When Opportunity Zones were created as part of the Tax Cuts and Jobs Act of 2017, the goal was to give investors a tax incentive to reinvest capital gains into economically distressed census tracts. States nominated tracts, the Treasury certified roughly 8,700 of them2, and investors who routed eligible capital gains into Qualified Opportunity Funds (QOFs) could potentially access three categories of tax benefits: deferral, reduction, and exclusion of tax.
That original program was designed as a temporary, one-time window with the incentives scheduled to sunset in 2026. In July 2025, however, the OBBBA restructured the program into a permanent part of the tax code, often referred to as “QOZ 2.0.” QOZ 2.0 has its own set of tax incentives, which generally affects investments made on or after January 1, 20273. The benefits differ from the original program but remain structured around the same three layers: deferral, basis step-up and exclusion.
Under QOZ 2.0, investors who reinvest an eligible capital gain into a QOF within 180 days may defer tax on that original gain. Instead of a single fixed recognition date, the deferral now runs on a rolling five-year clock tied to each investor’s own investment date. In general terms, a gain invested in 2027 would be recognized in 2032, a gain invested in 2028 would be recognized in 2033, and so on (or upon an earlier sale of the QOF interest).
At the end of the five-year period, and generally just before the recognition date, investors may receive a basis step-up that reduces the amount of the original gain subject to tax: 10% for investments in standard Opportunity Zones, or 30% for investments in Qualified Rural Opportunity Funds. If investors hold their Qualified Opportunity Fund interest for at least 10 years, they may be able to elect to step up your basis to fair market value at sale, which, if applicable requirements are met, may eliminate federal tax on the appreciation the QOF generates during the hold.4
Here’s the basic sequence of investing in OZs5:
Before investing in a QOF, you need a gain that actually qualifies for deferral. The IRS refers to these as “eligible gains,” and they generally include6:
The 180-day clock. You generally have 180 days from the date a gain is recognized to invest in a QOF. That clock doesn’t always start on the sale date. For example, for K-1 gains passed through from a partnership, it can instead start on the due date of the entity’s tax return7.
State conformity. This is the point that can catch even sophisticated investors off guard. The federal deferral doesn’t automatically apply at the state level, and some states do not conform to the federal QOZ tax benefits8. If you are in a non-conforming state, you could defer the gain federally while still owing state tax on it in the year of sale. This is a question to raise with your CPA before you invest, not after.
Under the original rules (investments through December 31, 2026)9: Deferred gains were all recognized on a single fixed date, December 31, 2026, regardless of when the investment was made. Gains realized on or before that date and invested in a QOF by then generally remain governed by the prior rules, requiring recognition by the earlier of an inclusion event or December 31, 2026. Investors still holding a qualifying investment on that date generally must recognize the deferred gain, though the original deferral election remains intact, preserving eligibility for the long-term basis step-up.
Under the new rules (QOZ 2.0, investments made in 2027 and beyond)10: A rolling five-year deferral applies to new investments, with new zone designations effective January 1, 2027, and a transition period for existing zone designations. In practice, your recognition date is tied to your investment date rather than a fixed calendar date.
| Category | QOZ 1.0 | QOZ 2.0 |
|---|---|---|
| Recognition date | Fixed: Dec. 31, 2026, for every investor | Rolling: 5 years from each investment date |
| Governing rules | Prior OZ rules apply; due by inclusion event or Dec. 31, 2026 | New QOZ 2.0 rules apply; tied to investment date |
| Zone designations | Original zone designations only | New zones effective Jan. 1, 2027; overlap with old zones through Dec. 31, 2028 |
| 2026 deadline | Deemed gain recognized, but deferral and step-up remain intact | No single cliff date; each investment has its own 5-year clock |
Hospitality assets can align well with the long-term framework of QOZ 2.0. Hotels and mixed-use hospitality developments are typically capital-intensive projects that require meaningful investment in construction, redevelopment, repositioning, and stabilization before reaching their full operating potential.
QOZ 2.0’s rolling five-year deferral period for qualifying investments beginning in 2027, tied to each investor’s investment date rather than a single fixed recognition date, may provide added flexibility for capital formation around the development and stabilization timelines inherent to hospitality projects.
Miami is a relevant market for this strategy given the depth and diversity of its hospitality demand drivers. The city benefits from international tourism, business and convention activity, direct global air connectivity, and one of the country’s largest cruise markets, while Downtown Miami continues to evolve as a mixed-use destination combining residential, office, retail, dining, entertainment, and hospitality.
Riverside Wharf Miami is an example of how a hospitality asset can capture the Opportunity Zone benefit in practice. The project is designed as a mixed-use hotel and entertainment complex on the Miami River in Downtown Miami, anchored by a 167-key Dream Hotel by Hyatt, alongside roughly 100,000 square feet of round-the-clock dining and entertainment, an 18,000-square-foot meeting and event space, and a reimagined version of The Wharf Miami11. To learn more, visit our offering page here.
Opportunity Zones remain among notable tools for potentially deferring and, in some cases, eliminating capital gains tax, but the program looks meaningfully different now that the OBBBA made it permanent in 2025. The three-layer structure of deferral, basis step-up, and exclusion still holds, but the mechanics investors relied on under QOZ 1.0 have changed: the fixed December 31, 2026 recognition date is gone, and QOZ 2.0 ties deferral to a rolling five-year clock that starts with each investor’s own investment date.
Realizing the benefit depends on the details, confirming which gains actually qualify, respecting the 180-day investment window, and checking whether your state even conforms to the federal deferral. Understanding these elements can help investors evaluate whether QOZ investing may fit their circumstances.
This blog is for informational and educational purposes only and does not constitute tax, legal, or investment advice, nor an offer to sell or a solicitation of an offer to buy any security. Opportunity Zone investing involves complex, evolving federal tax rules and carries risk, including possible loss of principal and limited liquidity. Consult a qualified tax advisor or attorney, as well as other applicable professional advisors before making investment decisions.
