WHAT ARE THEY AND HOW CAN TENANTS IN COMMON BEST UTILIZE THIS?

Important Tax Vehicle as a Long-Term Investment Strategy

Many taxpayers know about Opportunity Zones, a 2017 program that encourages development in state-designated tracts that are needed for redevelopment. The tax advantages are tremendous: this tax vehicle allows investors to defer and partly forgive tax on capital gains by reinvesting them in designated  census tracts. While the 2017 program was temporary, the One Big Beautiful Bill Act (P.L. 119-21, signed July 4, 2025) made it permanent and rebuilt it for investments made on or after January 1, 2027. That makes late 2026 an unusual moment: gains realized now can be timed to land under the new rules. The mechanics are the same under both laws. An investor sells an asset at a gain, invests the gain (not the full sale proceeds) in a Qualified Opportunity Fund (QOF) within 180 days, and elects deferral. The QOF must hold at least 90% of its assets in qualified Opportunity Zone property, such as real estate it buys and substantially improves, or an operating business in a zone. Let’s visit both laws – the original 2017 Act and its progeny, the 2025 Act – and see how these laws may assist investors, especially those electing tenant-in-common (TIC) ownership with another party.

OZ 1.0. OZ 1.0 was enacted in 2017 as part of the Tax Cuts and Jobs Act of 2017 and, essentially, offered three benefits, all keyed to a fixed calendar. The states’ governors designated about 8,764 tracts in 2018; however, those designations expire December 31, 2028, under OZ 1.0.

• Deferral. Tax on the reinvested gain was deferred until the QOF interest was sold or December 31, 2026, whichever came first.
• Basis step-up. Holding five years cut the deferred gain by 10%; seven years cut it by 15%. Because the deferral ended in 2026, only investors who got in by 2019 earned the full 15%, and by 2022 the step-up was gone entirely.
• Tax-free appreciation. Holding the QOF interest at least 10 years let the investor elect fair-market-value basis, so the growth inside the fund was never taxed. Final regulations allow this election through 2047.

OZ 1.0 has a flaw, which we call the “hard cliff”: every OZ 1.0 investor owes tax on the deferred gain for 2026, payable with the 2026 return in April 2027, often without having sold anything to pay it. Investments made during 2026 under the old rules get essentially no deferral.

Cometh the 2025 Act: OZ 2.0 (OBBBA – P.L. 119-21). OZ 2.0 replaces the fixed calendar with a rolling clock that starts at each investment, and applies to gains invested after December 31, 2026. Existing OZ 1.0 investments keep their old rules.

• Permanent program, new maps every 10 years. Governors nominated new tracts in a 90-day window that opened July 1, 2026 [see Rev. Proc. 2026-14]. The first new round runs January 1, 2027 through December 31, 2036.
• Tighter eligibility. The low-income test is stricter and the old “contiguous tract” option is gone, so experts expect roughly 20–30% fewer zones.
• Rolling five-year deferral. Deferred gain is taxed five years after the investment (or on an earlier sale), so a mid-2027 investment defers tax to mid-2032.
• One step-up for everyone. Every investor who holds for five years gets a 10% basis step-up; the 15% seven-year tier is repealed.
• Rural boost. A new Qualified Rural Opportunity Fund (QROF), with at least 90% of assets in rural zones, earns a 30% step-up, and rural property need only be improved by 50% of its basis instead of 100%.
• 10-year exclusion kept, with a 30-year cap. After 10 years, appreciation is tax-free; if held past 30 years, basis is fixed at its value on the 30-year anniversary.
• Reporting. Funds must report assets, investments, jobs and housing data annually, with penalties for failing to file.

The following is a summary chart: OZ 1.0 vs. OZ 2.0

Feature	OZ 1.0 (TCJA 2017)	OZ 2.0 (OBBBA 2025)
Program life	Temporary; investments through 2026	Permanent
Applies to	Gains invested 2018–2026	Gains invested on or after Jan 1, 2027
Zone maps	One round (2018), ~8,764 tracts, expire Dec 31, 2028	New round every 10 years; first runs 2027–2036; ~20–30% fewer tracts
Investment window	180 days from the gain	180 days from the gain
What must be invested	The capital gain only	The capital gain only
Deferral ends	Earlier of sale or Dec 31, 2026	Earlier of sale or 5 years after investing
Step-up on deferred gain	10% at 5 yrs, +5% at 7 yrs (now expired)	10% at 5 yrs; 30% for rural QROFs
Tax-free appreciation	After 10 yrs; election through 2047	After 10 yrs; basis frozen at 30-yr value if held longer
Substantial improvement	Double the building’s basis in 30 months	Same, but 50% for rural property
Fund reporting	Form 8996 asset test	Expanded annual reporting with penalties

How tenant-in-common owners can use Opportunity Zones. We have several clients who own property as tenants in common and want to take advantage of the OZ benefits.  First, one should understand that a tenancy in common is a form of ownership in which each co-owner holds a fractional, undivided interest in the property.  The key advantage of tenancy in common is that each co-owner holds an undivided interest directly and reports their own share of the gain. That means each owner can make their own Opportunity Zone decision, on their own 180-day clock, regardless of what the other owners do. In a partnership, by contrast, the partnership must elect first or hand the choice to partners on a set timetable.

• Each owner can devise their own investment strategy. Essentially, when the TIC property sells, each co-owner can invest just their share of the capital gain in a QOF and keep their original basis in cash. That is a key difference from a 1031 exchange, which requires reinvesting all proceeds and replacing debt. Unrecaptured Section 1250 gain (depreciation on real estate taxed at up to 25%) is capital gain and qualifies; ordinary-income recapture does not.
• Mixing strategies among co-owners works. One owner can do a 1031 exchange, another can invest in a QOF, and a third can simply pay the tax. This flexibility often makes a TIC easier to unwind than a partnership, where owners may need a “drop and swap” first.
• Co-owners can pool into one fund. A TIC itself cannot be a QOF, because a QOF must be a corporation or partnership. Co-owners who want to stay together can form a new LLC, self-certify it as a QOF on Form 8996, and each invest their gain in it to buy and improve property in a zone.
• Consider the timing of a 2026 sale.  A gain realized now and invested in 2026 is taxed for 2026 under the old cliff. Because the 180-day window can run past year-end, a TIC sale on October 17, 2026 could be invested as late as mid-April 2027, under the new five-year deferral and using the new zone map.

Example. Three equal co-owners sell a building for $3.0 million with a $1.2 million adjusted basis, a $1.8 million gain. Owner A invests her $600,000 share in a QOF in February 2027. She owes no tax until February 2032, and then only on $540,000 after the 10% step-up. If she holds the QOF interest at least 10 years, its appreciation is tax-free. Owner B completes a 1031 exchange and Owner C pays tax on his share, with no conflict among them.

Caveats for TIC owners. Keep these points in mind as you consider your strategies:

• A TIC that operates like a business (active management, shared services) may be treated as a partnership for tax, which changes who elects and when.
• Property the TIC already owns cannot simply be contributed to a QOF and count as OZ property; qualifying property must be purchased from an unrelated seller.
• A QOF buying the building from its own co-owners raises related-party problems.

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