As anticipated, President Trump’s One Big Beautiful Bill Act (the “OBBBA”), which was signed into law on July 4, 2025, significantly amends Sections 1400Z-1 and 1400Z-2 of the Internal Revenue Code of 1986, as amended (the “Code”). Those provisions address the U.S. federal qualified opportunity zone (QOZ) program that was originally enacted as part of the Tax Cuts and Jobs Act (the “TCJA”) during President Trump’s first term is office. This article outlines the amendments to the QOZ provisions and addresses the impact that such changes may have on current and prospective QOZ investors and sponsors.
Absent extension, prior designations of QOZs under the TCJA were set to expire on December 31, 2028. The amendments to Code Section 1400Z-1 under the OBBBA address this extension and provide for certain changes to the QOZ designation process as follows:
- Recurring QOZ Designation Process. The process for designating QOZs is made permanent and indefinite, recurring every 10 years, beginning with the initial “decennial determination date” of July 1, 2026. Governors will now designate low-income communities for OZ status on a rolling 10-year basis. For instance, those qualifying population census tracts that are designated (and certified) as QOZs in 2026 will retain their QOZ status for the period from January 1, 2027, through December 31, 2036, and, as of July 1, 2036, Governors will begin the QOZ designation process again for the next 10-year period. These rolling designation and certification dates are relevant for purposes of Code Section 1400Z-2, as well, since the applicable date on which a QOZ’s certification begins will determine the qualification of qualified opportunity zone property (QOZP) and qualified opportunity zone business property (QOZBP).
- More Restrictive Designations. The qualification of population census tracts is more restrictive under the BBB than it was under the TCJA. Further, tracts must be low-income communities, eliminating the ability for tracts contiguous to a low-income community to be designated as QOZs.
- Puerto Rico Limitations. Under the TCJA, all population census tracts in Puerto Rico were deemed to be designated and certified as low-income communities for purposes of the QOZ program, but the BBB repealed this provision, effective as of December 31, 2026. For future designation periods, Puerto Rico will be limited to the same 25% rule as other states [and territories].
In addition to changing the manner and timing of QOZ designation and certification, the OBBBA alters various provisions under Code Section 1400Z-2, which relates to the process for investing in qualified opportunity funds (QOFs), the timing of deferred gain recognition, the requirements of QOFs to hold QOZP and the requirements of a qualified opportunity zone business (a “QOZB”) to hold QOZBP. The notable revisions to Code Section 1400Z-2 are as follows:
- Permanent QOZ Investment. Under the TCJA, investments in QOFs had to be made on or prior to December 31, 2026. The OBBA repealed this sunset date for QOZ investment, providing for indefinite investment in the QOZ program.
- Rolling Five-Year Gain Deferral. Currently, all gain that has been deferred under the OZ program is to be recognized as of December 31, 2026 (or as of an inclusion event, if earlier). The amendments under the OBBBA provide that, for investments made after December 31, 2026, deferred gain will be recognizable as of the earlier of (i) the date on which an OZ investment is sold or exchanged, or (ii) the 5-year anniversary of the taxpayer’s QOF investment.
- Similar to the basis increases that were included in the initial OZ legislation (but have since expired), the OBBBA provides that QOF investments that are held for at least 5 years result in a basis increase equal to 10% of the investor’s deferred gain (30% in the case of any investment in a qualified rural opportunity fund (a “QROF”)). This basis increase serves to reduce the tax recognized on deferred gain at the expiration of the 5-year deferral period referenced above (e.g., in the case of a 10% basis increase, tax is only recognized on 90% of the investor’s deferred gain).
- Additional Benefits for Rural Investments. As discussed above, special benefits are provided for investments in QROFs. A QROF is a QOF that holds at least 90% of its assets in QOZP (directly or indirectly through equity interests in a QOZB) that is located in a rural OZ. Under the OBBBA, a “rural area” is defined to include any city or town with a population of equal to or less than 50,000 inhabitants and specifically excludes any area that is contiguous to an urbanized area with more than 50,000 inhabitants. In addition to the basis increase for a QROF investment, certain requirements are less stringent for investments in rural areas, including the substantial improvement requirement for existing structures in rural areas, which is reduced to 50% of a property’s adjusted basis from 100%.
- 10-Year Basis Step Up. The TCJA required eligible QOF investors to make an election following a minimum 10-year hold and a sale or exchange of their QOF interest (or the QOF’s underlying QOZP or QOZB assets) to get the basis step up to fair market value. The OBBBA provides that, for QOF (or QROF) investments made after December 31, 2026, the fair market value basis step up is automatic (i) on a sale or exchange following a 10-year hold, or (ii) as of the 30th anniversary of the QOF investment.
- Effective Dates. The changes to Code Section 1400Z-2 generally are effective as of December 31, 2026, provided, however, that the reduction in the substantial improvement requirement for existing structures in rural areas became effective immediately upon passage of the OBBBA. Note, that, for existing QOZ investors and sponsors, the current QOZ program rules under the TCJA generally remain in place, with the period of gain deferral ending as of December 31, 2026.
Finally, the OBBBA addresses past criticism of the QOZ provisions under the TCJA by increasing the annual reporting requirements of QOFs and QOZBs. New Code Section 6039K sets forth an extensive list of information that must be disclosed each year by QOFs (or QROFs, as applicable). Specifically, with respect to a QOF’s interest in a QOZB, if any, that information includes, without limitation, whether property of the QOZB is owned or leased, the value of the QOZB’s tangible property, the QOZB’s applicable trade or business code, the approximate number of residential units for any real property of the QOZB and the number of full-time employees of the QOZB or an indication of its employment impact. Prior reporting requirements did not address information sharing between QOFs and their QOZB subsidiaries, leaving the parties to address those matters in corporate documents. New Code Section 6039L, however, establishes a legal requirement for QOZBs (and qualified rural opportunity businesses (QROBs)) to provide written statements to QOFs (and QROFs) including the information that must be reported under new Code Section 6039K. New Code Section 6726 imposes steep penalties for QOFs, QROFs, QOZBs and QROBs that fail to comply with the new reporting requirements. The new reporting requirements and associated penalties are effective immediately upon enactment of the OBBBA, and the information generated by the additional reporting is to be used by the Secretary of the Treasury to produce annual and semi-decennial OZ impact reports.
The OBBBA’s changes to the QOZ program are favorable for investors and sponsors in post-2026 projects. Short of relaxed qualification rules for certain QOZ investments in rural areas, the benefits of the OBBBA’s amendments should not impact current QOZ investors and sponsors. That said, the OBBBA’s additional reporting requirements in new Code Sections 6039K and 6039L may be a challenge for current participants and their advisors. Given the immediate effectiveness of those requirements, QOZ investors and sponsors would be wise to start collecting the necessary information and keeping up-to-date records for easier year-end tax reporting.
While the December 31, 2026 effective date for most of the OBBBA’s amendments seems far off, potential QOZ investors and sponsors should consider the upcoming designation period beginning July 2026. Lobbying efforts are sure to begin soon for qualifying low-income communities to be designated and certified as QOZs for the next decennial QOZ period. In the interim, the lengthy period between the OBBBA’s enactment and the effective date of its QOZ amendments should give Treasury more than enough time to finalize regulatory guidance for the operation of the new law.
