Under the One Big Beautiful Bill Act (the “OBBBA”), the qualified opportunity zone (QOZ) program will no longer sunset on December 31, 2026, as was set to be the case prior to the act’s passage. Instead, the OBBBA makes this program permanent by extending it indefinitely. The act also makes some significant changes to the QOZ program for those looking to take advantage of its tax benefits moving forward. Below are some of the key elements of the new QOZ program under the OBBBA. It is important to note that nearly all of these changes go into effect on January 1, 2027, and provide no retroactive relief.
- Decennial Designations: In place of the previous expiration date of December 31, 2021, the OBBBA establishes rolling QOZ designations effective for 10 years each. Beginning on July 1, 2026, state governors will propose QOZ designations, which will be certified by the Treasury Secretary. These QOZ designations will be effective for 10 years, with the first spanning from January 1, 2027, through December 31, 2036.
- Greater QOZ Requirements: QOZs, prior to the OBBBA as well as after, are designated population census tracts that are low-income communities. The OBBBA makes it more difficult for a property tract to qualify as a QOZ by heightening the standards required to be considered a “low-income community.” Under the OBBBA, a low-income community means:
- any population census tract that is not located within a metropolitan area and whose median family income does not exceed 70% of the statewide median family income,
- any population census tract located within a metropolitan area whose median family income does not exceed 70% of the metropolitan area median family income, or
- any population census tract with a poverty rate of at least 20% and a median family income that does not exceed 125% of the statewide median family income or, if located within a metropolitan area, does not exceed 125% of the metropolitan area median family income.
This is contrasted with pre-OBBBA requirements, which allow low-income designation up to 80% of the median family income (compared against statewide and metropolitan areas, respectively) in (i) and (ii) above and which do not contain the 125% restriction in (iii) above.
Notably, the OBBBA also does away with the ability for population census tracts that are not low-income, but are contiguous to a low-income community and whose median family income is 125% or less than that of the contiguous low-income community property tract, to be designated as a QOZ. Additionally, the OBBBA nixes the special rule for Puerto Rico, which has allowed each population census tract in Puerto Rico that is a low-income community to be deemed and certified as a QOZ.
Under the OBBBA, as is the case prior, the number of population census tracts designated as QOZs cannot exceed 25% of the number of low-income communities across a state (unless the state has less than 100 such communities). With the new rolling decennial system, however, this limitation will apply to each 10-year period.
- New Deferral Rules: The OBBBA creates a new deferral timeline, replacing the set deferral date of December 31, 2026. Entering is a rolling 5-year schedule that allows gains from investment in a Qualified Opportunity Fund (QOF) to be deferred until 5 years after the investment is made, unless the investment is sold or exchanged prior to that time.
- Change in Basis Increase: Prior to the OBBBA, a taxpayer’s basis in a QOF investment is increased by 10% of the deferred gain amount at the 5-year anniversary of the investment with an additional 5% step-up once held for 7 years. Under the OBBBA, the basis of a QOF investment held for at least 5 years will still be increased by 10% (and importantly, immediately before the gain from the 5-year deferral, discussed above, is recognized), but the additional 5% step-up applied at year 7 is no more.
- Qualified Rural Opportunity Zones: The OBBBA introduces the concept of a qualified rural opportunity fund (QROF). A QROF is a QOF holding at least 90% of its assets in QOZ property, which either:
- is qualified opportunity zone business (QOZB) property which substantially all of its use was in a QOZ comprised solely of rural area, or
- is a QOZ stock or partnership interest in a QOZB in which all of the tangible property owned or leased is QOZB property and substantially all the use of which is in a QOZ comprised solely of rural area.
“Rural area” for this purpose means any area other than a city or town with a population greater than 50,000 inhabitants, and any urbanized area contiguous and adjacent to such city or town.
Under the OBBBA, investment in QROFs will allow for even greater tax benefits than will investment in “normal” QOFs. For an investment in a QROF, the 10% basis increase after 5 years, discussed above, is elevated to a 30% increase after the same 5 years. Further, the existing (and surviving) substantial improvement requirement—mandating property in a QOZ be improved by investing 100% of the adjusted basis of the property back into the property—is reduced to only 50% of the adjusted basis for property in a QOZ comprised entirely of a rural area.
- Tax-Free Exit Rules Altered in Later Years: For QOF investments held for at least 10 years, the basis in the investment property is the fair market value of such investment when it is sold or exchanged, allowing no gain to be recognized, and thus no tax to be imposed upon the sale or exchange. This is the case both before and after the enactment of the OBBBA; however, the OBBBA subjects these investments to a “freeze” at 30 years. In other words, if an investment is held for over 30 years, the basis of the investment will remain at the fair market value of that investment on the date 30 years after the date of the investment, causing the taxpayer to recognize any gain accumulated after the 30-year mark.
- Heightened Reporting: Along with all of these changes, the OBBBA, through establishing new IRC Sections 6093K, 6039L, and 6726, provides heightened reporting requirements and establishes a penalty system for such.
