SECTION 4. TRANSITIONAL

GUIDANCE FOR INVESTORS

.01 Gain realized on or before Decem- ber 31, 2026, and invested in a QOF on or before December 31, 2026 .

(1) In general . Under § 1400Z-2(a)(1) (A) and § 1.1400Z2(a)-1, in the case of a taxpayer with one or more eligible gains, as defined in § 1.1400Z2(a)-1(b)(11), at the election of the taxpayer, gross income for the taxable year will not include the aggregate amount of such gain invested by the taxpayer in a QOF during the 180day period beginning on the date of the events that gave rise to that gain. Prior § 1400Z-2(b)(1)(B) and § 1.1400Z2(b)1(b) provide that if gain was deferred by reason of an election under § 1400Z-2(a) for a timely qualifying investment made on or before December 31, 2026, then such gain must be included in the taxpayer’s gross income in the taxable year that includes the earlier of (i) the date on

which an inclusion event, as defined in § 1.1400Z2(b)-1(c), occurs with respect to such qualifying investment (or portion thereof), or (ii) December 31, 2026.

(2) Inability to make a deferral election for taxpayers holding qualifying invest- ments through December 31, 2026 . Taxpayers holding a qualifying investment (or portion thereof) through December 31, 2026, are required to include in income in the taxable year that includes that date the amount of remaining deferred gain from the qualifying investment as calculated under prior § 1400Z-2(b)(2) and § 1.1400Z2(b)1(e)(3) (deemed included gain). Taxpayers that recognize deemed included gain on December 31, 2026, continue to hold a qualifying investment for which an election under § 1400Z-2(a) remains in effect. See § 1400Z-2(e)(1)(A), §§ 1.1400Z2(a)1(b)(34) and 1.1400Z2(c)-1(b)(1)(i). Amounts of deemed included gain may not be deferred pursuant to either prior or current § 1400Z‑2(a)(1)(A) because, as noted above, an election continues to be in effect under prior and current § 1400Z2(a)(2) with respect to the eligible gain that gave rise to the deemed included gain on December 31, 2026. Thus, no amount of deemed included gain can be eligible gain with respect to which an election under either prior or current § 1400Z-2(a) may be made.

(3) Continued eligibility to make an election under § 1400Z-2(c) . Because the election under § 1400Z-2(a) with respect to a qualifying investment continues in effect when an eligible taxpayer recognizes deemed included gain in the taxable year which includes December 31, 2026, under prior § 1400Z-2(b)(1)(B) and § 1.1400Z2(b)-1(b)(2), the taxpayer remains potentially eligible to make an election under § 1400Z-2(c) on the later sale or exchange of that qualifying investment. (The election under § 1400Z-2(c) can be made only if the taxpayer satisfies the 10-year holding period requirement and the other requirements of § 1400Z‑2 and the regulations thereunder through the date on which the investment is disposed of. See § 1.1400Z2(c)-1(b)(1)(i).)

.02 Gain realized on or before Decem- ber 31, 2026, and invested in a QOF on or after January 1, 2027 .

(1) In general . Section 70421(c)(1) of the OBBBA modified prior § 1400Z-2(a)

(2) by allowing a deferral election to be made after December 31, 2026. In addition, § 70421(c)(2) of the OBBBA modified prior § 1400Z-2(b) in multiple ways, including by changing the taxable year of inclusion in prior § 1400Z-2(b)(1)(B) from that which includes December 31, 2026, to that which includes the date that is 5 years after the date the qualifying investment was made. Under § 1400Z-2(b)(2) (B), if a qualifying investment is held for at least five years, a taxpayer’s basis in the qualifying investment increases by 10 percent (or 30 percent, in the case of any investment in a qualified rural opportunity fund, as defined in § 1400Z-2(b)(2)(C)). Section 1400Z-2(b)(2)(B) and (C) are effective for amounts invested in QOFs after December 31, 2026. See § 70421(c) (5)(A) of the OBBBA.

(2) Gain eligible for deferral . In the case of a taxpayer with eligible gain realized on, before, or after December 31, 2026, who timely invests a corresponding amount in a QOF on or after January 1, 2027, the taxpayer may elect to defer the recognition of that gain provided the requirements under § 1400Z-2(a) are met. See § 1.1400Z2(a)-1(b)(7) for guidance on what is considered a timely investment. The deferred gain with respect to a qualifying investment made on or after January 1, 2027, must be included in gross income in the taxable year that includes the earliest of (i) the date on which such qualifying investment (or portion thereof) is sold or exchanged, (ii) the date on which an inclusion event other than a sale or exchange occurs with respect to such qualifying investment (or portion thereof), or (iii) five years from the date the qualifying investment was made. Section 1400Z2(b)(2)(B) provides for the determination of basis for purposes of determining the amount of gain included in gross income.

.03 Eligibility of inclusion event gain . (1) In general . Under § 1.1400Z2(a)1(b)(11)(iv)(A), gain with respect to a qualifying investment (or portion thereof) that is otherwise required to be included in gross income due to the occurrence of an inclusion event (inclusion event gain) may be eligible for deferral under § 1400Z-2(a) (1), provided that all of the requirements to elect to defer eligible gain under § 1400Z2(a)(1)(A) are met. For purposes of determining whether inclusion event gain is

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eligible gain under § 1400Z-2(a)(1)(A), such inclusion event gain is treated as if it were realized upon the occurrence of the inclusion event rather than on the sale or exchange that gave rise to the eligible gain to which the inclusion event relates. See § 1.1400Z2(a)-1(b)(11)(iv).

(2) Requirements to defer inclusion event gain under § 1400Z-2(a) . Inclusion event gain may be deferred by making a qualifying investment within 180 days of the inclusion event date. See § 1.1400Z2(a)-1(b)(11)(iv)(B). To the extent a taxpayer has an inclusion event with respect to any portion of a qualifying investment, that portion is no longer a qualifying investment and the taxpayer is not eligible to make an election pursuant to § 1400Z-2(c) with respect to that portion of the qualifying investment. For guidance on the treatment of the portion of a qualifying investment to which an inclusion event relates and the inability to make an election under § 1400Z-2(c) with respect to that portion of the investment, see § 1.1400Z2(c)-1(b)(1)(i).