Key Changes to Opportunity Zones with the OBBBA
Program Made Permanent with New Tax Deferral Period
The 2017 Tax Cuts and Jobs Act created the original Qualified Opportunity Zone (QOZ) program. The OBBA law makes Opportunity Zones permanent. The benefit of the permanent elimination of capital gains taxes on investor’s original capital gain investment in Qualified Opportunity Zone Funds (QOF) after holding investments for at least ten years was set to expire on December 31, 2026, but has now been made permanent, and will begin again in 2027 after the 2026 expiration. I often term this permanent elimination of capital gains as the holy grail of this program.
The tax deferral on the original capital gains has changed and is now a rolling five-year deferral period, with investors receiving a 10% basis step-up after the five-year period, providing some tax relief on the original deferred gains.
Currently, the deferral period is through 2026 but take note that the original deferral period is in place until 2027 at which time new investments made in 2027 will be eligible for the five-year tax deferral and stepped-up basis. Investors that can wait to harvest capital gains to 2027 to take advantage of the five-year tax deferral and of the 10% basis step-up that is not available for capital gains invested in QOZ funds in 2026.
Additional read for more information on changes to QOZs: Opportunity Zones: An Expert Guide to the Changes in the One Big Beautiful Bill | Kiplinger
Opportunity Zone Designations
The current set of QOZs will sunset at the end of 2026 (instead of 2028 as previously planned) and create a new set of zones beginning in January 2027. Governors must pick new zones every 10 years.
The threshold for designating a tract as a "low-income community" falls from 80% of area or statewide median income to 70%. A provision that allowed governors to designate as OZs census tracts contiguous to low-income communities was eliminated. Also, a 2017 provision that made nearly all of Puerto Rico's census tracts into QOZs was dropped. There will be about 20% fewer QOZs under the new law, according to QOZ advocates.
Enhanced Rural Investment Incentives
The OBBBA creates a new category of fund, a "Qualified Rural Opportunity Fund" (QROF), that provides investors with significant additional tax benefit compared to standard Opportunity Zone investments.
The law adds incentives for investments in rural areas. Among them, investors who put money in rural communities (defined as any place with fewer than 50,000 people, excluding tracts adjacent to a town or city with more than 50,000 people) and leave it there for five years would get up to a 30% reduction in the capital gains tax they owe on the deferred capital gains as opposed to those who invest in other OZs would get up to a 10% reduction.
Additional reading on the enhanced rural investments: 7 Key Changes to the Qualified Opportunity Zone Incentive Under the One Big Beautiful Bill Act | Seyfarth Shaw LLP
Mandatory Reporting Requirements (and penalties for non-compliance)
The new law contains new provisions to improve oversight and transparency on the economic impact of investments. QOFs will have additional reporting requirements including the value of the fund’s total assets, value of the investments, QOZ census tracts and information on investors that dispose of an investment. For investments in QOZ businesses the value of both tangible and intangible property will have to be reported, whether owned or leased and the number of employees. Most changes are expected to take effect on January 1, 2027 and more guidance is expected in advance of this date.
In addition, the new laws says that the Treasury secretary shall "as soon as practical… and annually thereafter" report the amount of money invested in QOZs, the percentage of eligible census tracts that have received QOZ investment and how much has been invested in each one, the approximate number of employees in QOZ-financed businesses for each census tract, and the number of residential units resulting from QOZ projects.
Financial Impact
The Joint Tax Committee of Congress estimates that the QOZ provision of the bill will reduce federal revenues by $40.9 billion between 2025 and 2034 versus what revenues would have been had Congress let the 2017 law stand.
Additional read for more information on research into QOZs: How did the One Big Beautiful Bill Act change Opportunity Zones? | Brookings
What Wasn't Changed
The House bill doesn't make some changes that QOZ critics have advocated. For example, it doesn't provide bigger tax breaks for investors in very poor communities. It doesn't restrict the types of investments eligible for the QOZ tax break: self-storage facilities, luxury condos, high-end student housing, pickleball courts, and gold vaults would still be eligible.
The legislation represents a significant expansion and restructuring of the original QOZ program, with particular emphasis on incentivizing rural investment while maintaining the core tax benefits that have driven over $100 billion in investments since 2017.