The Landscape
Phase 1 vs. Phase 2 – What Changed
The original program was a proof of concept. QOZ 2.0, made permanent under the OBBBA, takes the lessons seriously – more incentives where they're warranted, more accountability where they weren't.
| Dimension |
Phase 1 (2018–2026) |
Phase 2 (2027+) |
| Program Status |
Sunset December 31, 2026 |
Permanent Stable |
| Deferral Period |
Fixed – all gain recognized 12/31/26 |
Rolling 5-year from date of investment Flexible |
| Basis Step-Up |
10% at 5 years, 15% at 7 years |
10% at 5 years (rural: 30%) Rural boost |
| 10-Year Exit |
Full appreciation exclusion |
Same – plus 30-year FMV step-up cap Kept |
| Zone Designations |
Frozen from 2018 map |
Redesignated every 10 years from July 2026 Rolling |
| Rural Incentives |
None |
QROFs: 30% step-up, 50% improvement threshold New |
| Reporting |
Minimal – honor system |
Mandatory: jobs, units, tract-level data New burden |
| Penalties |
Limited enforcement |
Up to $50K for willful noncompliance Sharp teeth |
| Capital Flow Pattern |
~67% into real estate; minimal operating biz |
Broader push toward operating businesses + rural |
| Community Engagement |
Optional, rarely done |
Reporting requirements create implicit pressure |
| Eligibility Criteria |
80% median income threshold |
Narrowed to 70% – about 22% of old zones removed Tighter |
| State Conformity |
Patchwork – many states non-conforming |
Still patchwork – CA planning required separately |
California Note
California does not conform to federal QOZ rules. Gains deferred federally are still recognized for CA state tax purposes in the year of the original sale. QOZ planning for CA-resident clients requires a parallel state strategy – often pairing QOZ deferral with loss harvesting, charitable vehicles, or entity-level planning to address the state-side recognition event.
The Process
Our Phase 2 Framework
Six stages from first conversation to exit. Not a checklist – a living process we refine with every engagement, updated as IRS guidance evolves and new designation data arrives.
1
Qualify the Gain and Set the Goalpost
Before any zone conversation, confirm you have a qualifying gain to deploy and understand the full tax picture on both sides of the trade.
- Confirm gain type: capital gain, §1231 gain, or K-1 distributive share (each has its own 180-day clock rules)
- Calculate federal deferral benefit vs. California recognition event – model both scenarios side by side
- Determine realistic hold period: are you a 10-year investor or are there liquidity constraints at year 5 or 7?
- Set a return goalpost – what IRR justifies the illiquidity? QOZ math only works if the underlying deal also works
- Flag IRMAA exposure: a large QOZ gain recognition in 2026 or at exit can spike MAGI into a higher Medicare tier
Phase 2 Timing Note
For post-2026 investments, the deferral clock runs 5 years from your investment date – not a fixed calendar end. This removes the urgency distortion that caused many Phase 1 investors to rush into underprepared deals. Use it.
2
Map the Zone – Then Talk to the City
Finding a designated tract is the easy part. Understanding what that community actually needs – and who's already working there – is what separates a defensible investment from an expensive mistake.
- Use the new IRS-published eligible tract list (Revenue Procedure 2026-14) to identify candidate zones; governors nominate new zones by July 1, 2026
- Contact the local economic development agency – most have a prospectus detailing project types needed (workforce housing, grocery, medical, light industrial)
- Attend a city planning or zoning meeting if possible; relationships here also protect against permitting delays later
- Ask directly: what has been tried and failed in this tract? That answer is worth more than any third-party market study
- For rural QROFs: identify whether the tract qualifies as entirely rural under IRS Notice 2025-50 to access the 30% step-up and 50% improvement threshold
3
Structure the Fund Correctly From Day One
Self-certification is a privilege, not a shortcut. The structure you file on Form 8996 needs to hold up through a 10-year hold and the new mandatory reporting regime.
- QOF must be a partnership or corporation – single-member LLCs do not qualify
- 90% asset test: at least 90% of fund assets must be Qualified Opportunity Zone Property, tested semi-annually
- Substantial improvement requirement: for used property, improvements must equal or exceed the original purchase price of the depreciable property (50% for rural QROFs)
- Set up tract-level data tracking from day one – employment figures, residential unit counts, investment amounts by tract are all now required reporting fields
- Engage fund counsel early; the penalty structure for noncompliance now reaches $50K for larger funds
The Integrity Point
Self-certification means your Form 8996 is your commitment. The IRS reviews outcomes, not intent – but the reporting requirements now create a paper trail that runs in both directions. Document your community impact the same way you document your basis.
4
Layer the Tax Strategy
QOZ is a powerful standalone tool. Combined with other provisions now made permanent under the OBBBA, the integrated strategy is where the real planning lives.
- Cost segregation + bonus depreciation: 100% bonus depreciation is back permanently – apply to QOZ property placed in service to accelerate deductions in early hold years
- §199A deduction: now permanent; pass-through income from QOZ operating businesses may generate a 20% deduction if structured correctly
- SALT planning: OBBBA raised the SALT cap to $40K for AGI under $500K – reducing income to that threshold via QOZ deductions can unlock an additional ~$10K in federal savings
- IRMAA management: model the gain recognition event at year 5 and year 10 against Medicare tier thresholds – the 2-year lookback makes exit timing a Medicare planning question too
- State tax mitigation: for California clients, pair with loss harvesting, charitable remainder trusts, or installment sales to address the CA recognition event
5
Build in the Philanthropic Layer (Optional but Powerful)
For clients whose portfolio of gains exceeds the QOZ investment, or who want to go beyond the minimum – the philanthropic overlay is where tax efficiency and genuine impact compound together.
- Charitable deductions only produce benefit above the standard deduction ($30,000 MFJ in 2026) – bunching strategies or a DAF can make itemizing worthwhile
- Donor-Advised Fund (DAF): contribute appreciated assets, take the deduction in the year of contribution, grant to community organizations within the QOZ over time
- Charitable Remainder Trust (CRT): useful for CA clients facing a large recognition event – defer, receive income stream, ultimate remainder to charity
- QOZ + DAF pairing: invest the gain in QOF, contribute other appreciated assets to DAF in the same year to offset the CA recognition – the two vehicles work together
- Community Development Financial Institutions (CDFIs): partnering with a CDFI operating in the zone adds credibility, community roots, and often unlocks local co-investment
Vehicle
Donor-Advised Fund
Contribute in a high-income year, grant over time. Appreciated stock or real estate works well. No restriction on which charities receive grants.
Best for: clients with appreciated assets and a giving intent but no specific charity in mind yet
Vehicle
Charitable Remainder Trust
Sell appreciated property inside the trust, avoid immediate capital gain, receive an income stream, partial charitable deduction up front.
Best for: CA clients with a large gain recognition event needing state-side mitigation
Vehicle
Direct Community Investment
Fund a CDFI or community land trust operating in the zone. Not deductible as a direct investment, but can be structured as a below-market loan or equity with charitable components.
Best for: clients who want visible, local impact with their name on it
Vehicle
Private Foundation
Full control over grantmaking, 5% minimum annual distribution, PRIs (program-related investments) can count as QOZ-adjacent. Higher setup cost, higher visibility.
Best for: clients with $5M+ in assets and a multi-generational legacy intent
6
Manage the Hold, Document the Impact, Plan the Exit
The 10-year hold is where the tax-free appreciation builds. It's also where most investors lose their documentation discipline. Don't.
- Annual compliance: file Form 8996, maintain 90% asset test documentation, track substantial improvement progress
- New Phase 2 reporting: employment figures, residential unit counts, investment amounts by census tract – set up a simple tracker at deal close, not year 9
- Model the exit 2–3 years before year 10: what is the FMV of the investment, what is the stepped-up basis, what does tax-free appreciation look like vs. a partial exit?
- IRMAA at exit: a large QOF disposition triggers MAGI in the year of sale – model the 2-year lookback impact on Medicare Parts B and D premiums
- Estate planning overlay: QOF interests held at death may reset basis – coordinate with estate counsel before any transfer or gifting
The Legacy Framing
At year 10, a successful QOZ investment is three things simultaneously: a tax-free gain, a community that is measurably better, and a documented record of both. That's the file you hand to your heirs, your estate attorney, and – if necessary – your auditor. Build it from day one.
Brand Language
The Lines That Lead
Three lines, three moments in the conversation. Stack them or use them separately – each one does different work.
Primary – Hero / Homepage
Leave a legacy that's loved.
For the client who has already made the money and is quietly asking what it's for. Alliterative, emotionally precise, no flattery required.
Sub-tagline / Supporting
Less owed. More owned. Built to last.
The financial logic in three beats. "Built to last" replaces "what matters" – tighter, more confident, implies both structure and staying power.
QOZ Lead Magnet / Section Header
Long-term capital, lasting change.
Pairs the investor's time horizon with the community outcome. Clean enough for an email subject line, substantial enough for a report cover.
How They Stack
Used together on a homepage or deck cover: lead with Leave a legacy that's loved as the headline, Less owed. More owned. Built to last. as the sub-tagline directly below, and Long-term capital, lasting change. as the section label over the QOZ content. Three registers – emotional, financial, structural – without repeating the same idea twice.
About Spark + Stone
Who We Are, Why It Matters
The practice was built on a simple premise: the most powerful tax strategies are the ones you can actually defend at year ten.
Spark + Stone is a boutique real estate tax and advisory practice. We work with high-net-worth investors, operators, and family portfolios navigating the terrain where tax law, real estate, and long-range planning converge.
Our clients don't come to us for a return. They come because the return is already there, and what they need is a strategy that holds – through an audit, a market cycle, an estate transition, and a decade of changing rules.
What We Do
Real estate tax planning, Qualified Opportunity Zones, cost segregation, depreciation strategy, K-1 analysis, and IRMAA/Medicare planning for California-based high-net-worth clients.
How We Work
Remote-first, deeply collaborative. We act as the tax lead in a broader advisory team – coordinating with estate counsel, financial planners, and fund managers so the strategy is coherent, not siloed.
What We Believe
Tax strategy and community impact are not a tradeoff. The clients who ask "what is this capital actually building?" tend to make better investments – and sleep better at year five.
Why QOZ, specifically
Qualified Opportunity Zones are among the most misunderstood provisions in the tax code – equally dismissed as too complex and too good to be true. Neither is accurate. The mechanics are specific, the compliance is real, and the window for doing it sloppily has closed. What remains is a permanent, well-structured program that rewards long-term capital deployed with intention. That happens to be exactly the kind of planning we do.
We built this framework because our clients kept asking the same question in different ways: is this actually worth it? The answer, when the deal is right and the structure holds, is yes – measurably, documentably, and in ways that outlast the tax benefit itself.
10
years to tax-free appreciation
Permanent
program status under OBBBA
30%
basis step-up for rural QROFs at year 5
$0
federal tax on appreciation held 10+ years
Leave a legacy that's loved.
Less owed. More owned. Built for what matters.
Framework Disclosure. This document reflects Spark + Stone's working process as of May 2026, incorporating guidance under the One Big Beautiful Bill Act (OBBBA, P.L. 119-21) and IRS Revenue Procedure 2026-14. It is a living framework – updated as Treasury issues further QOZ 2.0 guidance, new zone designations are certified, and client-specific facts evolve. Nothing here constitutes legal advice or a specific investment recommendation. California non-conformity, state-level treatment, and entity-specific structuring require separate analysis. Every situation is different; this is our starting point, not a final answer.