This article is educational and is not legal or tax advice. It describes proposed regulations that are not final and may change before they are adopted. Confirm any position with your tax advisor.
What did Treasury and the IRS propose on September 11, 2026?
Treasury and the IRS published proposed regulations (REG-116506-25, 91 FR 57968) that would require every Qualified Opportunity Fund to file an annual information return under a new §6039K, and would require each qualified opportunity zone business to furnish a supporting statement to the funds that hold it under a new §6039L. Buried in the detail is a reporting field that a cost segregation study already answers as a by-product: for each census tract, how much of the fund's qualified opportunity zone business property is real property.
That single field is why this proposal matters to anyone who owns depreciable property inside an Opportunity Zone. The proposed rule does not define real property loosely — it defines it by excluding tangible personal property, using a standard that is the same line a cost segregation engineer draws when separating a building's structural components from its personal property. Below is what the proposal asks for, what it does not ask for, and the dates that actually matter. Nothing is due for the 2026 tax year.
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When are comments due, and when would this take effect?
Written or electronic comments are due October 16, 2026, and a telephonic public hearing is scheduled for November 5, 2026 at 10:00 a.m. ET, with requests to speak due October 13, 2026. Comments go through the Federal eRulemaking Portal under docket IRS-2026-1223, indicating "IRS and REG-116506-25".
On timing, the proposal is prospective: the reporting obligations would apply to returns and statements originally due, without extensions, on or after the date final regulations are published. So a fund filing for 2026 is not filing under these rules. Treasury has also said it anticipates updating Form 8996 to reflect the new requirements once the regulations are finalized. Anyone telling you there is a 2026 filing emergency is selling something.
What would a Qualified Opportunity Fund actually report?
Much of the proposed content already appears on today's Form 8996 — the fund's qualified opportunity zone businesses, their taxpayer identification numbers, values at the 6-month and year-end testing dates used for the 90-percent investment standard. The new material sits in proposed §1.6039K-1(d)(6), which would require reporting per census tract:
- the census tract number and a physical address for the business activity in it;
- the NAICS code for the activity in that tract;
- the value of qualified opportunity zone business property directly owned and, separately, directly leased, as of the fund testing dates;
- the total value of that property which is real property, as of December 31;
- the total number of residential units, as of December 31;
- the approximate average monthly number of full-time equivalent employees working in the tract;
- the first date any such property was acquired by purchase or leased;
- whether property in the tract is being substantially improved, and the date that improvement began; and
- whether a working capital safe harbor is in use and when it is expected to end.
Proposed §1.6039K-1(d)(7) would also require the fund to disclose which valuation method it used — the applicable financial statement method or the alternative valuation method under §1.1400Z2(d)-1(b)(3) and (4).
The real-property field is a cost segregation question
Proposed §1.6039K-1(a)(11) would define real property as land and improvements thereto — buildings and other inherently permanent structures, including items that are structural components of them — that are not tangible personal property as defined in §1.48-1(c).
That cross-reference is the whole story. §1.48-1(c) is the long-standing investment-credit definition of tangible personal property, and it is the same authority practitioners rely on when a cost segregation study separates a building's structural components from property that is not structural — specialty electrical serving equipment rather than the building, removable floor coverings, process piping, decorative millwork, and similar items. Treasury picked an existing, well-travelled standard rather than inventing a new one, which is the right call.
The practical consequence is straightforward. Most owners capitalize a building as one asset on one recovery period. Nothing in that record says which portion is a structural component and which is tangible personal property under §1.48-1(c). A cost segregation study produces exactly that split, because the split is the study. A fund that has one can answer the field from a schedule it already owns. A fund that does not has no line item that answers it.
An honest caveat, because it matters more than the sales pitch: the proposed regulations do not require anyone to perform a cost segregation study, and nothing in them says a fund must hire an engineer to file a return. We have filed a public comment on this docket recommending that Treasury state expressly that a filer without a component-level allocation may report the entire adjusted basis of a building and its structural components as real property, with a disclosure that no allocation was made. That approach costs the filer nothing and is conservative for the statistics Treasury is trying to build. If you would otherwise never have commissioned a study, this proposal is not a reason to start.
Why this connects to depreciation and recapture inside an Opportunity Zone
The reason the real-property split shows up in two different places at once is that it was always doing two jobs.
For depreciation, the split is what moves basis out of the 39-year or 27.5-year bucket into 5-, 7- and 15-year property. Every dollar reclassified into a recovery period of 20 years or less becomes eligible for bonus depreciation under §168(k) — at 100% for qualified property acquired after January 19, 2025 under the OBBBA amendments, and at the TCJA phase-down rate for property acquired on or before that date, with IRS Notice 2026-11 treating the acquired-date test as turning on the written binding contract date rather than the closing date.
For recapture, the split normally comes back to bite. Accelerated depreciation is ordinarily a timing benefit: §1245 property recaptures as ordinary income on sale, and the building's share carries unrecaptured §1250 gain at up to 25%. Inside an Opportunity Zone this changes — after a 10-year hold, an investor may elect under §1400Z-2(c) to treat the basis of the qualifying fund interest as its fair market value on the date of sale, which removes the recapture that would otherwise claw the deduction back. That election, and only that election, is what turns cost segregation inside an OZ from a timing play into a permanent benefit. We walk through that mechanic in detail on our Opportunity Zone cost segregation page.
And for the substantial improvement test under §1400Z-2(d)(2)(D)(ii), the same allocation sets the threshold: additions to basis are measured against the property's adjusted basis excluding land, so how much of the purchase price is land, how much is building, and how much is personal property all change the number a project has to clear.
One field on a proposed information return therefore touches the deduction, the recapture and the qualification test simultaneously. That is unusual, and it is why the proposal is worth reading rather than skimming.
What are the penalties, and are they as bad as they sound?
Under §6726, a fund that fails to file a complete and correct §6039K return on time would owe $500 for each day the failure continues, subject to an annual cap of $10,000 per return — rising to $50,000 for a large fund, meaning one with gross assets exceeding $10 million at the close of its taxable year. Where the failure is due to intentional disregard, the daily amount rises to $2,500 and the cap to $50,000, or $250,000 for a large fund. All of these amounts are subject to a cost-of-living adjustment.
Two things temper that. First, because the OBBBA placed §6726 in the same part of the Code as the existing information-reporting penalties, the §6724 reasonable-cause waiver applies — no penalty where the failure is due to reasonable cause and not willful neglect. Second, the failure-to-furnish penalties on the investor statements and the §6039L business statements run through §6722 at $250 per statement, subject to an annual cap, with reduced amounts for prompt correction and a de minimis exception.
The headline "$500 a day" is real. It is also capped, inflation-indexed, and waivable for reasonable cause, and none of it can be triggered before final regulations exist.
What should a fund sponsor actually do before October 16?
Three things, in order of how much they cost.
Read the fields against your own books. Take proposed §1.6039K-1(d)(6) and ask, field by field, whether you could answer it today from records you already keep. Most sponsors find the census tract, address, NAICS code and testing-date values are already there, and that the real-property split, the first acquisition date and the improvement commencement date are not.
Comment if a field would be hard for you. The preamble specifically requests comment on whether the uniform December 31 valuation date creates undue burdens, whether the calendar-year reporting convention burdens fiscal-year funds, and whether non-publicly-traded funds would know their investors' acquisition dates and basis. A comment that says "here is the record I keep, and here is why that field does not match it" is more useful to Treasury than a comment that says the rule is burdensome.
Fix the allocation only if you had a reason to anyway. If you are placing property in service, testing substantial improvement, or sitting on an unexamined 39-year building, the component allocation was already worth doing on its own merits and this proposal is a second use for it. If none of that is true, wait for final regulations. You can compare providers on our cost segregation companies comparison, or check whether a study makes sense for your property before spending anything.
Frequently Asked Questions
Do the proposed §6039K rules require a cost segregation study?
No. The proposed regulations require a fund to report how much of its qualified opportunity zone business property is real property as defined in proposed §1.6039K-1(a)(11), but they do not prescribe a method for determining that figure and do not require an engineering analysis. A cost segregation study produces the split as a by-product, which makes the field easy to answer for a fund that already has one, but no provision conditions filing on having performed one.
When do Qualified Opportunity Funds have to start filing under §6039K?
Not for 2026. The proposed rules would apply to returns and statements originally due, without extensions, on or after the date the final regulations are published, and Treasury has said it anticipates updating Form 8996 at that point. Until final regulations exist, current Form 8996 reporting continues to apply.
How does the proposed definition of real property differ from what a cost segregation study classifies?
Proposed §1.6039K-1(a)(11) defines real property as land and improvements including structural components, excluding tangible personal property as defined in §1.48-1(c) — so a building reported as real property excludes items a cost segregation study would classify as personal property and depreciate over 5 or 7 years. On a typical commercial or multifamily building the personal property and land improvement share commonly runs 20% to 35% of depreciable basis, so the real-property figure and the total capitalized cost are not the same number.
Does depreciation recapture apply if I hold an Opportunity Zone investment for ten years?
After a 10-year hold, an investor who makes the §1400Z-2(c) election to treat the basis of the qualifying fund interest as its fair market value on the date of sale does not face the depreciation recapture that would otherwise arise. Before year ten, recapture is entirely normal: §1245 property recaptures as ordinary income and the structural share carries unrecaptured §1250 gain at up to 25%.
What is the penalty for failing to file the new §6039K return?
Under §6726 the penalty is $500 for each day the failure continues, capped annually at $10,000 per return, or $50,000 for a fund with gross assets exceeding $10 million at the close of its taxable year, with higher amounts for intentional disregard and a cost-of-living adjustment. The §6724 reasonable-cause waiver applies, so no penalty is imposed where the failure is due to reasonable cause and not willful neglect.
How do I submit a comment on REG-116506-25?
Comments are due October 16, 2026 through the Federal eRulemaking Portal under docket IRS-2026-1223, indicating "IRS and REG-116506-25"; paper submissions go to CC:PA:01:PR (REG-116506-25), Room 5503, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Once a comment is submitted electronically it cannot be edited or withdrawn.
Holding property in an Opportunity Zone and unsure whether the component allocation is worth doing? Check your property in a few minutes, or read how the 10-year election changes the depreciation maths on our Opportunity Zone cost segregation page.
