The Qualified Opportunity Zone (QOZ) program, established in 2017 as part of the Tax Cuts and Jobs Act (TCJA), is a federal tax incentive designed to encourage investment in distressed areas of the United States. The designation of “Opportunity Zone” is given to low-income communities nominated by state governors and certified by the Treasury Department. The QOZ program was initially set to expire at the end of 2026. However, the One Big Beautiful Bill Act (OBBBA), passed on July 4, has permanently extended and modified the program.

How it works: taxpayers can choose to reinvest eligible capital gains into a Qualified Opportunity Fund (QOF), which then invests in Opportunity Zone properties. Eligible capital gains include those from the sale of stock and bonds, cryptocurrency, real estate, and private business interests, to name a few. These taxpayers can then claim a deferral for those capital gains on their federal income tax return. Further, a taxpayer could reduce those capital gains with a basis step-up if the qualifying investment is held for a certain duration of time. The signature benefit of the program, however, is the exclusion of tax on any new capital gains in the QOF, as long as the investment is held for at least 10 years. 

Let’s take a look at the key changes made to the Opportunity Zone program by the One Big Beautiful Bill Act.

1. New QOZs designated every 10 years.

Under the OBBBA, new Qualified Opportunity Zones will be proposed by state governors every 10 years, beginning on July 1, 2026. These designations must be approved by the Treasury secretary. Current QOZ designations are set to sunset at the end of 2026.

2. Updated eligibility criteria.

The OBBBA has created a new, narrower definition of a “low-income community.” Now, to qualify as a QOZ, census tracts must meet one of the following criteria for a low-income community: (1) the median family income does not exceed 70% of the state or metropolitan median family income (reduced from 80% under the TCJA) or (2) the poverty rate is at least 20% and median family income does not exceed 125% of the applicable median. The OBBBA also eliminates the ability of governors to designate contiguous tracts (that would otherwise be ineligible) as Opportunity Zones.

3. New Deferral Timeline – 5 Years

Under the OBBBA, gains invested into a QOF after December 31, 2026 are deferred until 5 years after the initial investment, or earlier if the investment is sold before 5 years. The pre-OBBBA rules had established a set deferral date of December 31, 2026.

4. Simplified basis step-up.

The OBBBA creates a single 10% basis step-up for investments made in Qualified Opportunity Funds after December 31, 2026, and held for at least five years (30% for rural QOZs). The law removes the previous 5% and 10% incremental step-ups at five and seven years. This basis step-up reduces the deferred capital gain recognized after year 5.

5. New incentives for rural QOZs.

The OBBBA establishes a new fund for rural areas, known as the Qualified Rural Opportunity Fund (QROF), which provides a 30% basis step-up (compared to the standard 10%) for investments held for at least five years. The new law also reduces the substantial improvement requirement for rural Opportunity Zones from 100% to 50%, making it easier for investors to finance redevelopment projects in rural areas.

6. New reporting requirements.

The OBBBA establishes new information reporting requirements for QOFs and QROFs, as well as updated penalties for failure to comply with these requirements.

7. New end date to exclusion of capital gains.

The OBBBA establishes a new end date for the exclusion of new capital gains on a qualifying investment held at 10 years. Previously, investments held at least 10 years would be permanently excluded from capital gains on any of the appreciation of the QOF investment. Under the OBBBA, the same 10-year minimum stays in place, but after the 30^th year, the basis will be stepped up and locked in at the fair-market-value as of that 30-year date.

Example of Timeline:

1. Realize eligible capital gain (e.g. sell stock or real estate at a gain).
2. Invest eligible capital gain in a QOF (can be a portion or all of total gain).
3. Defer capital gain via reporting on that year’s tax return.
4. Year 5 → receive a 10% basis step-up (reduce deferred capital gain by 10%).
5. Year 5 tax return → recognize deferred capital gain.
6. Years 10-29 → automatic basis step-up to fair market value. Option to exit QOF tax-free via a sale or exchange during this time.
7. Year 30 → Basis step-up freezes at fair market value. Any gain accumulated after this date will be subject to capital gains tax.

Looking Forward

Now that the Opportunity Zone program has been enhanced and made permanent, real estate developers and investors can plan to use this incentive as a part of their long-term business strategy. Keep in mind that the new reporting requirements will demand increased attention to information tracking and compliance. For further guidance on navigating the new Qualified Opportunity Zone changes, please don’t hesitate to reach out to our real estate accounting professionals at RBT CPAs. Our team is here to support all of your accounting, tax, audit, and advisory needs. Give us a call today to learn more.