Yes, a Qualified Opportunity Fund (QOF) can hold some investments outside a Qualified Opportunity Zone (QOZ), but there are strict limits. A QOF generally must hold at least 90% of its assets in qualifying Opportunity Zone property. A business receiving QOF investment may also conduct certain activities outside a designated zone if it meets the separate requirements for a Qualified Opportunity Zone business (QOZB).
How Does the QOF 90% Investment Test Work?
Under Internal Revenue Code Section 1400Z-2, a QOF must hold at least 90% of its assets in qualifying Opportunity Zone property. The three qualifying asset categories are:
- Qualified Opportunity Zone business property: Eligible tangible property used in a qualifying trade or business.
- Qualified Opportunity Zone stock: Qualifying stock acquired in an eligible corporation.
- Qualified Opportunity Zone partnership interests: Qualifying ownership interests in eligible partnerships.
The 90% standard is generally determined by averaging the qualifying asset percentages on two testing dates: the final day of the first six-month period of the fund’s tax year and the final day of that tax year. Special timing and valuation rules may apply.
This means a fund can hold some nonqualifying assets without automatically violating the 90% standard. However, an investment in an ordinary business outside a QOZ does not become qualifying Opportunity Zone property simply because the fund owns it.
Can a Qualified Opportunity Zone Business Operate Outside the Zone?
Yes, a QOZB may conduct some activities outside designated zones while meeting the applicable requirements. Generally, it must satisfy several tests, including:
- 70% tangible property test: At least 70% of its owned or leased tangible property must qualify as Opportunity Zone business property.
- 50% gross income test: At least 50% of its gross income must come from the active conduct of business within one or more QOZs, using applicable regulatory tests and safe harbors.
- Intangible property test: A substantial portion of its intangible property must be used in the active conduct of business within a QOZ.
- Financial property restriction: Generally, less than 5% of its property, measured under the applicable basis rules, may consist of nonqualified financial property, subject to exceptions.
Other restrictions, including prohibited business activities, also apply. A company with customers, employees, or assets outside a zone is not necessarily ineligible. Its full operations and property must be evaluated.
For additional background, see the types of assets a QOF can invest in and restrictions on businesses receiving QOF investments.
Example of a QOF Holding Nonqualifying Assets
Consider a hypothetical QOF with $10 million in total assets. Assume its qualifying asset percentages are the same on both testing dates.
- $9.2 million in qualifying Opportunity Zone property represents 92% of its assets.
- $800,000 in nonqualifying investments represents the remaining 8%.
- The fund satisfies the 90% numerical investment standard under these assumptions.
If qualifying assets instead represented only $8.5 million, the fund’s percentage would be 85%. That would fall below the required standard, potentially triggering a penalty unless an applicable exception or relief provision applies.
What Happens if a QOF Falls Below 90%?
Failing the 90% investment standard does not automatically terminate a fund’s QOF status or cancel every investor’s tax benefit. The law provides a potential monthly penalty, with reasonable-cause relief available in qualifying circumstances.
Funds report compliance and calculate applicable penalties using IRS Form 8996. Fund managers should document asset values, qualifying investments, testing dates, and any relevant exceptions.
What Should Investors Verify?
Opportunity Zone rules were amended in 2025, with important provisions affecting investments and property acquisitions beginning in 2027. IRS Notice 2026-40 also addresses transition issues involving earlier zone designations and qualifying property.
Before investing, review the fund’s asset composition, the underlying business’s zone activity, its compliance documentation, and which rules apply to the investment date. Investors comparing structures can also review how a Qualified Opportunity Fund works.
A QOF’s ability to hold some non-zone assets is not a blanket exception to the Opportunity Zone requirements. The specific asset, business structure, location, and applicable testing rules determine whether an investment qualifies.