7 Key Changes to the Qualified Opportunity Zone Incentive Under the One Big Beautiful Bill Act

1. The QOZ program has been extended indefinitely. The original QOZ program was scheduled to expire for new investments on December 31, 2026. The OBBBA eliminates that sunset, giving the QOZ program new (perpetual) life. Under the revised framework, every 10 years, state governors will propose new qualified opportunity zones, and the Treasury Secretary will certify those zones, with the effective date for those new QOZ designations being on July 1, 2026 (and every 10 years thereafter). Once certified by the Treasury Secretary, each census tract will remain a QOZ for 10 years beginning January 1 of the following year. The law also updates the acquisition window for QOZ Business Property to match the new designation cycle. Previously, qualifying property had to be acquired after December 31, 2017; now, that date will reset with each new cycle.

While the OBBBA does not specify how the July 1, 2026 date aligns with the effective date for most of the QOZ program revisions, the majority of which take effect after December 31, 2026, or what happens to investments made in QOZs that cease to qualify as such after a decennial redesignation, guidance is expected. Nevertheless, given the program’s goal of driving investment into economically disadvantaged areas, at least with respect to the QOZ designation loss issue, it seems fairly safe to expect that investments made while a tract is designated as a QOZ will continue to qualify for all of the benefits accorded to QOZ investments.

2. New rolling gain deferral and permanent 10% basis step-up. In keeping with the permanent extension of the QOZ program, for investments made after December 31, 2026, gains deferred through investment in the QOZ program will now be recognized on the fifth anniversary of the investment date, rather than on a fixed date. Consistent with that rolling gain deferral rule, the OBBBA makes permanent a 10% basis step-up benefit, which takes effect immediately before the end of the 5-year gain deferral period. This means that, after December 31, 2026, all gains that are not prematurely triggered (i.e., through a sale or exchange of an investment in a QOF) will have the benefit of a 10% basis increase. Notably, the OBBBA eliminates the additional 5% step-up (which previously applied at the 7-year mark), capping the benefit at 10%. Of course, all investments under the QOZ program through December 31, 2026 will be subject to the current QOZ program gain deferral rules and thus receive the gain deferral benefit (and potentially the basis step-up benefit, depending on when the QOZ investment was made) only until December 31, 2026.
3. Stricter eligibility criteria will apply to QOZ designations. The OBBBA tightens the rules around which census tracts can qualify as QOZs. Under current rules, a census tract’s eligibility to be part of the QOZ program was measured by reference to the New Markets Tax Credit definition of “low-income community,” which generally required the census tract to have a poverty rate of at least 20% or that median family income not exceed 80% of the applicable state or metropolitan area median family income.

   After December 31, 2026: a) Tracts will qualify as QOZs only if median family income does not exceed 70% (rather than 80%) of the applicable state or metropolitan area median family income; b) The alternative poverty rate test (20% or more) remains, but it is augmented with a “anti-gentrification” trigger that disqualifies applicable census tracts if median family income exceeds 125% of applicable state or metropolitan area median family income; c) The much derided “contiguous tract” rule, which allowed a census tract contiguous to a “low-income community” to be designated as a QOZ census tract so long as its median family income did not exceed 125% of the median family income of the low-income community to which the tract was adjacent, is repealed; and d) The blanket QOZ designation for all low-income communities in Puerto Rico is also repealed, effective as of December 31, 2026.

Regulatory guidance will be useful to confirm, for example, as we would expect, that a census tract that initially satisfies the alternative poverty rate test but that, between decennial designation dates, fails the median family income requirement, will continue to qualify as a QOZ until the end of the decennial designation period.

4. New Qualified Rural Opportunity Funds with supercharged tax benefits. Recognizing that much of the investment focus of the QOZ program has been on urban and suburban areas, the OBBBA creates a new category of fund, a “Qualified Rural Opportunity Fund” (QROF), that provides investors with more generous tax benefits. A QROF is just like a QOF, except that its 90% “good” asset test, including with respect to any QOZ business (QOZB) in which the QOF owns an interest, is further required to be invested in a QOZ comprised entirely of a rural area. A “rural area” is any area other than (1) a city or town with a population of greater than 50,000, and (2) an urbanized area adjacent to a city or town with a population in excess of 50,000.

The tax benefits obtained by QROFs are substantially enhanced relative to those available to “regular” QOFs – specifically: a) a rolling 30% basis-step up after 5 years (compared to a 10% basis step-up for “regular” QOFs); and b) a reduced “substantial improvement” requirement – only in excess of 50% of adjusted basis must be reinvested in property improvements (compared to in excess of 100% of adjusted basis for “regular” QOFs).

While most QROF provisions take effect after December 31, 2026, the reduced “substantial improvement” threshold is effective immediately, although the practical application of this immediate “substantial improvement” rule is subject to further clarification.

5. Gain elimination frozen after 30 years. In alignment with the program’s permanent extension, the OBBBA eliminates the sunset provision terminating QOZ benefits for QOF investments liquidated after December 31, 2047, and instead opts for a 30-year rolling horizon on gain elimination with respect to post-10-year dispositions of QOF investments. Specifically:

• For investments sold or exchanged before 30 years, the step-up will reflect the fair market value of that investment as of the date such investment is sold or exchanged.
• For investments held 30 years or more, the basis-step up will be frozen at the fair market value on the 30th anniversary of the investment.

6. New reporting requirements (and penalties for non-compliance). The OBBBA introduces a detailed reporting regime via new Code Sections 6039K and 6039L, and a new penalty provision in Code Section 6726. These provisions are designed to improve oversight and transparency regarding the economic impact of QOF investments.

Under rules that will be promulgated in future regulations, QOFs will be required to report to the IRS on items including the value of its total assets, the value of its QOZ property, the North American Industry Classification System (NAICS) codes that apply to its businesses, the QOZ census tracts it invests in, the amount invested in each QOZB (as applicable), the value of its tangible and intangible property and whether it is leased or owned, the number of residential units it owns, and the approximate full time employees it employs. In addition, it will be required to provide reports regarding investors that dispose of an investment in a QOF, and will be required to provide such reporting to those investors. QOZBs will be subject to a similar reporting regime, principally oriented at providing the information above to the IRS and to its QOF owners.

Failure to comply with the new reporting requirements may result in penalties of up to $10,000 per return, or up to $50,000 for QOFs with over $10 million in assets, with harsher penalties for willful non-compliance. These figures will be adjusted for inflation.

7. Most changes take effect on January 1, 2027. Nearly all of the new QOZ provisions take effect after December 31, 2026—the same date that marks the end of the original program’s investment period and the date when deferred gains are recognized under current law. Unlike the first iteration of the QOZ rules, where there was no regulatory guidance for many months, the extended runway provided by the OBBBA gives stakeholders ample time to prepare, and it is expected that the IRS will issue proposed and final regulations well in advance of the effective date.