Opportunity Zones were established in the Tax Cuts and Jobs Act of 2017 as a temporary, place-based tax incentive to spur economic investment in distressed communities. Tax benefits for new investments in Qualified Opportunity Zones (QOZ) were set to expire after Dec. 31, 2026. 

The One Big Beautiful Bill Act (OBBBA) makes the opportunity zone program a permanent feature of the tax code, but includes several modifications and enhancements to the original tax incentive. 

Qualified Opportunity Zones Must Be Re-Designated Every 10 Years

Current QOZ designations will sunset at the end of 2026 instead of 2028 as under the original law. As the program is now permanent law, governors will be required to redesignate QOZs every 10 years. To kick off this decennial process, new QOZ designations are to be made within a 90-day period beginning on July 1, 2026, subject to approval by the Treasury secretary. The new designations will take effect for new investments in those zones on Jan. 1, 2027. 

Governors can designate up to 25% of their state’s eligible census tracts as QOZs. If a state has fewer than 100 eligible census tracts, a total of 25 census tracts may be designated as a QOZ. 

The OBBBA tightens up the criteria for eligible census tracts. Eligibility is based on a census tract meeting one of two definitions for a “low-income community.” One, the census tract does not exceed 70% of the relevant median income, which is a reduction from the 80% threshold in the original 2017 law. The alternative test is based on a poverty rate of at least 20%, but unlike the original 2017 law, the census tract is disqualified if its income levels exceed 125% of the area median income. 

The original law also allowed governors to designate certain census tracts that were otherwise ineligible but neighbored an eligible low-income community (contiguous census tracts) as QOZs. Under the OBBBA, contiguous census tracts are not eligible for future QOZ designations. 

These changes are anticipated to significantly reduce the number of eligible census tracts. 

Tax Incentives Modified, New Rural Enhancement Added

Eligible investments into Qualified Opportunity Funds (QOFs) remain limited to capital gains, but the OBBBA makes several modifications to the tax benefits. 

Original QOF investments under the 2017 law were eligible for three tax benefits:

1. Temporary deferral of capital gains taxes owed on the initial investment;
2. A basis step-up on the initial capital gain, which reduces tax liability when the gain is realized; and
3. Permanent exclusion from taxable income of new capital gains generated by an investment held for at least 10 years. 

To receive the basis step-up, under the 2017 law, the original investment dollars were required to remain in a QOF for five years, which triggered a 10% basis step up, or if held for seven years, a 15% basis step-up. 

The OBBBA modifies the tax incentives to simplify the benefits and reflect the newly permanent status of the tax benefit. For investments made after Dec. 31, 2026, taxpayers may defer capital gains taxes owed on their initial investments for five years, based on the date the investment is made. The initial investment will continue to be eligible for a 10% basis step-up at the five-year mark. However, the OBBBA eliminates the additional basis step-up at the seven-year mark. The OBBBA maintains the tax exclusion on new capital gains generated by a qualifying investment held at least 10 years, but if the investment is held longer than 30 years, the stepped-up basis will be frozen at the fair market value of the 30th anniversary of the investment. 

QOZs located in rural areas will be eligible for enhanced tax benefits. The OBBBA establishes a Qualified Rural Opportunity Fund (QROF), which is a fund that is invested in rural QOZs. A rural area is any city or town with a population less than 50,0000, excluding census tracts adjacent to a town or city with more than 50,000 people. 

Initial investments will receive a 30% step-up basis adjustment at year five instead of 10%. The OBBBA also reduces the substantial improvement requirement for rural investments, which otherwise requires QOFs to improve existing property by more than 100% of the property’s original basis. Properties located in eligible rural areas face a reduced 50% threshold for substantial improvements. While most of the changes to opportunity zones take effect in 2027, this lower substantial improvement requirement took effect immediately. 

The Treasury Department will likely provide additional guidance on which census tracts are eligible for the enhanced rural benefits. 

New Reporting Requirements Established

The OBBBA also includes new reporting requirements for QOFs, including the type of qualifying property, the number of residential units, the value of total assets, number of employees, and which QOZ census tracts the fund invests in, amongst other items. Failure to comply with the new reporting requirements may result in fines up to $10,000 per return or $50,000 for funds with over $10 million in assets.