The Opportunity Zone 10-Year Rule and Basis Step-Up, in Plain English
An investment in a Qualified Opportunity Fund carries two separate tax benefits. A basis step-up reduces how much of your deferred gain is taxed when it is included. After 10 years, an election can exclude the investment's own appreciation from tax. Which version you get depends on when you invest.
The free OZ basis step-up and 10-year exclusion calculator follows one investment through both benefits and lays out a dated timeline.
Inputs
- The date you invest (on or before December 31, 2026 is OZ 1.0; after is OZ 2.0)
- The deferred gain you invest
- An assumed annual growth rate, which can be negative. The page calls it an assumption, not a forecast.
- How many years you hold
- Federal rates on the deferred gain and on appreciation
- Whether the fund is a qualified rural opportunity fund (30% step-up, OZ 2.0 only)
- Whether you make the 10-year election
What you get back
A timeline
The tool shows the investment date, the date the deferred gain is included and the tax due date, and the sale date with the appreciation excluded.
The step-up
Under OZ 2.0, holding five years raises basis by 10% of the deferred gain, or 30% in a rural fund. The tool shows the dollar value of that step-up.
The exclusion
Hold 10 years or more and make the election, and basis is set to value at sale, so the appreciation is not taxed. The calculator shows how much growth that shields.
A comparison
It also compares the result with paying the tax now and investing the rest, on the same growth assumption, in nominal federal dollars.
Step by step: running one investment
- Open the step-up and 10-year exclusion calculator.
- Enter the date you invest. On or before December 31, 2026 means OZ 1.0; after means OZ 2.0.
- Enter the deferred gain, an assumed growth rate and your hold period.
- Check the federal rates. The default on the deferred gain is 23.8%.
- Tick the rural fund box only if the fund is a qualified rural opportunity fund.
- Turn the 10-year election on, then off, to see what it is worth.
Hypothetical example: a $1M gain
Hypothetical example, for illustration only. A seller invests a $1,000,000 deferred gain in a standard (non-rural) QOF in 2027. After five years, the OZ 2.0 step-up raises basis by 10% of the deferred gain, which is $100,000, so $900,000 of the original gain is included in year five. In a qualified rural fund, the step-up would be 30%, or $300,000. If the seller then holds past 10 years and elects, appreciation on the fund investment is excluded. How much that saves depends entirely on growth, which is why the calculator asks for an assumed rate rather than predicting one.
OZ 1.0 vs OZ 2.0 in one table
| OZ 1.0 (invested by Dec 31, 2026) | OZ 2.0 (invested after) | |
|---|---|---|
| Deferred gain included | Earlier of sale or Dec 31, 2026 | Earlier of sale or 5 years after investing |
| Step-up | 10%/15% windows have closed | 10% after 5 years; 30% for a rural fund |
| 10-year exclusion | Yes, election through Dec 31, 2047 | Yes; basis capped at the 30-year value |
Source: OZI tax benefits guide and Form 8997 tracker.
Common mistakes
- Thinking the 10-year rule makes the original gain tax-free. It applies to appreciation on the QOF investment.
- Selling at year nine. A sale before 10 years is taxed on the fund's appreciation.
- Selling before year five under OZ 2.0. The sale itself becomes the inclusion event, with no step-up.
- Treating the growth rate as a forecast. It is your assumption.
Questions to bring to your CPA or adviser
The tool gives you a starting point. Before you act, these are worth asking:
- Which rules, OZ 1.0 or OZ 2.0, will my investment fall under, given the date I can realistically invest?
- What growth rate is reasonable to model for this fund, and what happens to the result if growth is zero or negative?
- Does my state conform to the 10-year exclusion?
- What is my plan if I need liquidity before year five, or before year ten?
- How is the 10-year election made, and what records will I need to keep?
- How does the fund plan to exit, and does its timeline fit a 10-year hold?
- How does this compare with a 1031 exchange or simply paying the tax for my situation?
Where this fits for luxury sellers and buyers
For a seller sitting on a large gain, the 10-year exclusion is the part that matters most, and it is the easiest to misunderstand. It does not erase the original gain; it excludes growth on the fund investment. Running the numbers before you commit helps you compare an OZ fund with a 1031 exchange into another property or simply paying the tax.
More free Opportunity Zone tools
This is one of several free planning tools in the Opportunity Zone tools library on Opportunity Zone Invest. Compare all three paths with the 1031 vs DST vs Opportunity Zone calculator.
FAQ
Does the 10-year rule exclude my original gain?
No. It excludes appreciation on the QOF investment. The deferred gain is taxed when it is included, reduced by any step-up.
When is the deferred gain included under OZ 2.0?
Five years after you invest, or earlier if you sell.
Are the growth numbers predictions?
No. You choose the growth rate; it is an assumption.
Not tax advice. Tool outputs are estimates based on the figures you enter and current published rules. Investors get Opportunity Zone tax benefits only by investing through a Qualified Opportunity Fund. Talk to a CPA or tax attorney before you act.