The One Big Beautiful Bill Act (OBBBA) was signed into law on July 4, 2025. As part of the OBBBA, Congress has recharged and permanently extended the tax benefits offered by the Qualified Opportunity Zone (QOZ) program.
Initially, the QOZ program was part of the Tax Cuts and Jobs Act of 2017 and was enacted to encourage investment in certain economically distressed areas. As originally enacted, the QOZ program provided for two benefits. By reinvesting the proceeds from a taxable sale into QOZ property, a taxpayer was not only able to defer the capital gain associated with a sale but, as an additional benefit, a taxpayer was also permitted to avoid a portion of the gain on the disposition of the QOZ replacement property. If that taxpayer held that investment for at least 5 years, he would be able to avoid 10% of the gain because he would have been able to increase his basis in the QOZ replacement property by 10%. If he held it for at least 7 years, he would be able to avoid 15% of the gain. If he held it for at least 10 years, the entire gain could have been avoided, including the initial amount of capital gain that was rolled over.
Because the benefit was initially set to expire on December 31, 2026, no one could achieve any permanent deferral for any rollover after December 31, 2021. Therefore, other than the deferral of any tax on the rollover amount till December 31, 2026, there was no tax benefit for investing in a QOZ replacement property. Therefore, the interest in the QOZ program waned after December 31, 2021.
For example, a taxpayer sells stock for $110 with a basis of $10 in 2018. If he were to properly reinvest the $100 in QOZ replacement property, he would be available to avoid paying tax on the initial gain of $100. If he held that property for at least 5 years, his basis at the end of the 5 year period would be $10 (10% of the initial $100 investment). If he held it for at least 7 years, his basis would increase to $115 (15% of the initial $100 investment). However, because December 31, 2026 was prior to the 10 year holding period, he would have to pay tax on the $85 ($100 of initial gain less $15 of increased basis) of gain, even though he has not disposed of the QOZ replacement property. However, provided he holds the QOZ replacement property for at least 10 years, he would not owe any additional tax on the sale of that property. Therefore, as you can see, after December 31, 2021 other than the deferral of the tax on the initial rollover amount, there was no tax benefit to investing in a QOZ replacement property.
OBBBA Improvements
The OBBA has not only extended the initial benefits provided by the TCJA, but also expands the benefits.
First and foremost, it makes the benefits of the QOZ program permanent. Therefore, there is no longer a need to pay tax on December 31, 2026 on any rollover gain that was initially deferred.
It also maintains the 10% basis increase after 5 years but eliminates the 15% basis increase after 7 years. However, the OBBBA preserves the original rule allowing for the full elimination of post-investment gains on investments held for 10 years or more and clarifies that this benefit is available for up to 30 years. If an investment is held for greater than 30 years, the taxpayer will receive a basis equal to the fair market value on the 30th anniversary of the investment and any appreciation after the 30th anniversary will be subject to capital gains.
The OBBBA also introduced enhanced benefits for a taxpayer investing in “rural opportunity zones.” Rather than receiving a 10% increase in basis on the 5th anniversary, a taxpayer investing in a rural opportunity zone receives a 30% increase in basis. A “rural opportunity zone” is any property located in a QOZ zone that lies outside cities or towns with a population of over 50,000 and is not part of an adjacent urbanized area. This additional benefit is implement to encourage additional investment in rural areas. In addition to the additional basis, there are relaxed requirements on additional capital investments to qualify as a QOZ replacement property.
QOZ’s are a powerful tool in order to mitigate future capital gains. However, the requirements to properly utilize and implement QOZ’s are complex and should be carefully examined with your tax advisor. A failure to comply with those requirements could not only result in a loss of the deferral but also potential penalties.
