SECTION 5. TRANSITIONAL

GUIDANCE FOR QOFS AND QOZBS

.01 Tangible property acquired after December 31, 2026 .

(1) In general . In order for tangible property to meet the “acquired by purchase” requirement under § 1400Z-2(d) (2)(D)(i)(I), such property must be purchased, as defined in § 179(d)(2), after the applicable start date, as defined in § 1400Z-1(e)(2), with respect to the QOZ (that is, January 1 following the date on which such QOZ was certified and designated as a QOZ). The amendment to the language in prior § 1400Z-2(d)(2)(D)(i) (I) by § 70421(c)(4)(A) of the OBBBA, from property acquired by purchase after “December 31, 2017” to property acquired by purchase after the “applicable start date,” applies to any property acquired after December 31, 2026. See § 70421(c) (5)(B) of the OBBBA. Thus, § 1400Z-1(e) (2)’s definition of “applicable start date” is effective only for a QOZ designated after the date of enactment of the OBBBA. See § 70421(b)(4) of the OBBBA. A previously designated QOZ does not have an “applicable start date” under § 1400Z1(e)(2) because its designation took place

before the date of enactment of OBBBA. Therefore, property acquired by a QOF or QOZB after December 31, 2026, cannot be QOZBP unless (i) the property is acquired for use in a QOZ that is designated after July 4, 2025, or (ii) one of the exceptions in section 5.01(2) and (3) of this notice applies.

(2) Property acquired pursuant to a working capital safe harbor plan after December 31, 2026 .

(a) In general . Section 1400Z-2(d) (3)(A)(ii) incorporates § 1397C(b)(8), which requires that less than 5 percent of the average of the aggregate unadjusted bases of the property of the relevant entity be attributable to nonqualified financial property in each taxable year. In general, under § 1397C(e), “nonqualified financial property” means debt, stock, partnership interests, options, futures contracts, forward contracts, warrants, notional principal contracts, annuities, and other similar property specified in regulations. However, under § 1397C(e) (1), this term does not include reasonable amounts of working capital held in cash, cash equivalents, or debt instruments with a term of 18 months or less. For purposes of applying § 1397C(e)(1) to a QOZB under § 1400Z-2(d)(3), § 1.1400Z2(d)1(d)(3)(v) provides a safe harbor under which working capital assets are treated as reasonable in amount if the following requirements, provided in § 1.1400Z2(d)1(d)(3)(v)(A) through (C), are satisfied. First, the working capital assets must be designated in writing for the development of a trade or business in a QOZ, including when appropriate the acquisition, construction, and/or substantial improvement of tangible property in the QOZ. Second, there must be a written schedule consistent with the ordinary start-up of a trade or business for expenditure of those working capital assets. Under the schedule, the working capital assets must be spent within 31 months of the receipt by the business of the assets. Third, the working capital assets must be used in a manner that is substantially consistent with the writing and the written schedule. A single business may benefit from more than a single application of the working capital safe harbor, provided that each application independently satisfies all of the requirements of § 1.1400Z2(d)-1(d)(3)(v)(A)

through (C). See § 1.1400Z2(d)-1(d)(3)(v) (E). Additionally, pursuant to a working capital safe harbor for start-up businesses that are not yet operating as a trade or business, these entities may treat certain amounts as satisfying the requirements for QOZB qualification under § 1400Z-2(d) (3)(i) for the duration of the working capital safe harbor. See § 1.1400Z2(d)-1(d)(3) (vi).

(b) Transition guidance regarding QOZBP . If an entity acquires property after December 31, 2026, for use in a previously designated QOZ and pursuant to a written plan meeting the requirements of the § 1.1400Z2(d)-1(d)(3)(v) and (vi) working capital safe harbors, then that property may satisfy the acquisition requirement of § 1400Z-2(d)(2)(D)(i)(I) if (i) the working capital plan was adopted on or before December 31, 2026, (ii) the relevant property acquisitions are made in a manner substantially consistent with that plan, (iii) the QOZB has received at least ten percent of the total estimated working capital assets designated in writing pursuant to the plan by December 31, 2026, and (iv) the QOZB expends at least five percent of the total estimated working capital assets by December 31, 2026. Amounts required to be expended by a QOZB pursuant to a binding agreement entered into prior to January 1, 2027, will be considered to be expended for purposes of the requirement to expend five percent of the total estimated working capital assets by December 31, 2026.

(c) Transition guidance regarding QOZP . Stock or partnership interests acquired after December 31, 2026, pursuant to a written plan described in this section 5.01(2), are treated as acquired after the “applicable date” for purposes of § 1400Z-2(d)(2)(B)(i)(I) and § 1400Z2(d)(2)(C)(i). (3) Tangible property acquired in the ordinary course of business after Decem- ber 31, 2026, for use in a previously des- ignated QOZ . Tangible property acquired after December 31, 2026, by a QOF or QOZB for use in the ordinary course of its trade or business in a previously designated QOZ to replace existing tangible business property may be treated as QOZBP if the requirements of § 1400Z-2(d)(2)(D) are otherwise met. Replacements in the ordinary course of a trade or business include

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the replacement or modernization of property necessary to continue the operations of the trade or business. Replacements in the ordinary course of a trade or business do not include tangible property acquired pursuant to the expansion of a trade or business or the transition of a trade or business into a new trade or business.

(4) Examples . The following examples illustrate the application of the provisions in section 5.01(1) through (3) of this notice.

(i) Example 1—Tangible property acquired pur- suant to the expansion of a trade or business . QOZB A owns and operates an industrial manufacturing facility in Tract A, which was designated as a QOZ in 2018 under prior § 1400Z-1. On June 15, 2028, QOZB A purchases a new warehouse on an adjacent plot of land from an unrelated third party to expand the facility’s capacity to produce a new product. The new warehouse acquired by QOZB A on that date is not located in a tract that was designated as a QOZ effective January 1, 2027. Because the new warehouse was not acquired after the applicable start date of a tract designated as a QOZ on January 1, 2027, it is not QOZBP under the general rule in section 5.01(1) of this notice. Because the new warehouse was not developed pursuant to a written plan within the scope of section 5.01(2) of this notice and was acquired pursuant to the expansion of QOZB A’s trade or business within the meaning of section 5.01(3) of this notice, it cannot qualify as QOZBP. (ii) Example 2—Replacement of existing tangible business property in the ordinary course of the trade or business . QOZB A owns and operates an apartment building that is QOZBP in Tract B, which was designated as a QOZ in 2018 under prior § 1400Z-1. The apartment building is not located in a tract that was designated as a QOZ effective January 1, 2027. In 2028 and in 2029, the apartment building requires window replacements and the purchase of replacement appliances, fixtures, cabinetry, flooring, and similar tangible property pursuant to the renovation of apartment units when tenants vacate the premises. These acquisitions are necessary for the continued operation of the apartment building and are replacements in the ordinary course of business that qualify as QOZBP under § 1400Z-2(d)(2)(D). See section 5.01(3) of this notice. (iii) Example 3—Modernization of property necessary to continue the operations of the trade or business . QOZB C operates a trade or business as a restaurant in Tract D, which was designated as a QOZ in 2018 under prior § 1400Z-1. The restaurant is not located in a tract that was designated as a QOZ effective January 1, 2027. In 2028, in order to maintain operations and embrace industry advancements, the restaurant renovates and modernizes its kitchen, including adding a new ventilation system to its kitchen to improve energy efficiency and replacing its point-of-sale system for a system with tools tailored specifically for the restaurant. The renovation and modernization of the kitchen are necessary for the continued operation of the restaurant in an efficient manner and are replacements in the ordinary course of business that qualify as QOZBP under

§ 1400Z-2(d)(2)(D). See section 5.01(3) of this notice.

(iv) Example 4–Property acquired pursuant to a working capital safe harbor plan adopted prior to December 31, 2026 . QOF A forms domestic C corporation B (QOZB B) to develop a large mixeduse real estate development that will consist of commercial and residential real property. QOZB B has a master written plan for the completion of the commercial and residential developments over a 55-month period that is estimated to cost $50 million with $30 million allocated to the initial commercial development phase and $20 million allocated to the subsequent residential development phase. The plan provides that the commercial development will be completed over a 30-month schedule, ending on November 30, 2026, and subsequently, the residential development will be completed over a 25-month schedule, estimated to be completed by December 31, 2028. The plan further provides that a portion of the commercial development is unable to be used in a trade or business after the completion of the commercial development since that portion of the commercial development will be unusable during the residential construction phase. On May 1, 2024, QOF A acquires stock of QOZB B in exchange for cash of $30 million. QOZB B expends the full $30 million in completing the commercial development by December 2026. Pursuant to QOZB B’s original master plan for the completion of the real estate development, QOF A acquires additional stock in QOZB B for cash in December 2026, and QOZB B begins to use the cash for the residential development phase in early 2027. The development is located in Tract D, which was designated as a QOZ in 2018 under prior § 1400Z-1. The development is not located in a tract that was designated as a QOZ effective January 1, 2027. The mixed-use development satisfies the safe harbor in section 5.01(2) and acquisitions of tangible property made pursuant to the plan may qualify as QOZBP if they are made in a manner substantially consistent with the plan.

(v) Example 5— Property acquired pursuant to a working capital safe harbor plan adopted prior to December 31, 2026 . The facts are the same as example 4, except that in November 2027 it becomes apparent that the residential development is over budget, delayed by three months, and will require additional capital to complete a portion of the residential development that includes a swimming pool for use by apartment residents. In December 2027, QOF A acquires additional stock of QOZB B solely in exchange for cash. The cash received by QOZB B in December 2027 is expended in accordance with the initial master plan established in 2024 to complete the residential apartment complex, including the completion of the swimming pool. The residential development is completed and placed into service by March 2029. The swimming pool was an integral part of the initial master plan established by QOZB B in May 2024. See § 1.1400Z2(d)-1(d)(3)(vi)(A). The commercial and residential real property may qualify as QOZBP assuming the other requirements of § 1400Z-2(d)(2)(D) are met. Because the stock was acquired in exchange for cash needed to complete development of the project, it may be treated as having been acquired after the applicable date pursuant to section 5.01(2)(c) of this notice.

.02 Compliance tests after a QOZ des- ignation period ends .

(1) In general . Section 70421(c)(3) of the OBBBA amended prior § 1400Z-2(c) by providing that, in the case of any qualifying investment held by the taxpayer for at least 10 years and with respect to which the taxpayer makes an election under that subsection, the basis of such qualifying investment equals its fair market value on the earlier of (i) the date such qualifying investment is sold or exchanged, or (ii) the date that is 30 years after the date of that qualifying investment. Section 1400Z-2(c) is effective for amounts invested in QOFs after December 31, 2026. See § 70421(c) (5)(A) of the OBBBA. Prior § 1400Z-2(c) allowed a taxpayer holding a qualifying investment for at least 10 years to make an election under prior § 1400Z-2(c) to adjust the basis of the property equal to the fair market value of that qualifying investment on the date that qualifying investment was sold or exchanged (without regard to the number of years that have passed since the date of the qualifying investment). Section 1.1400Z2(c)-1(c) provides that, for dispositions occurring before January 1, 2048, the ability to make an election under prior § 1400Z-2(c) for qualifying investments held for at least 10 years is not impaired solely because, under § 1400Z-1(f), the designation of one or more QOZs ceases to be in effect. See also § 1.1400Z2(c)-1(d), Example 1 . Section 1400Z-2(d) contains multiple requirements the satisfaction of which are dependent on whether property owned by a QOF or QOZB, or a trade or business engaged in by a QOF or QOZB, is located in a QOZ. Given that § 1400Z2(c) and § 1.1400Z2(c)-1(c) contemplate the ability to continue a qualifying investment made in a QOZ after its designation as a QOZ ceases to be in effect, the Treasury Department and the IRS expect that the forthcoming proposed regulations will include the following safe harbors for QOFs and QOZBs to continue to satisfy these requirements after the expiration of a QOZ’s designation period.

(2) Substantial use element of the defi- nition of QOZBP . For tangible property to qualify as QOZBP, substantially all of the use of that property must be in a QOZ for substantially all of the entity’s holding period for such property. See § 1400Z2(d)(2)(D)(i)(III); see also § 1.1400Z2(a)

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ulations, once published in the Federal Register, would apply to taxable years ending after the date this notice is issued to the public. See § 7805(b)(1)(C).