OBBBA Makes Opportunity Zones Permanent: What Investors Need to Know
- Viktoriya Barsukova, EA, MBA
- Oct 9
- 5 min read
OBBBA Revives Your Ability to Kill Capital Gains with QOFs
The One Big Beautiful Bill (OBBBA) has rescued the Qualified Opportunity Zone program from expiration and made significant tax changes that will take effect in 2027.
In the meantime, new investments in existing Qualified Opportunity Zones may dwindle.
What Is a Qualified Opportunity Zone?
The Qualified Opportunity Zone (QOZ) program was created by the Tax Cuts and Jobs Act in 2018 to spur investment in low-income communities.
Thousands of lower-income census tracts were designated as Qualified Opportunity Zones. Several thousand Qualified Opportunity Funds (QOFs)—corporations, partnerships, or limited liability companies (LLCs)—were organized to pool money from taxpayers to invest in these zones.
Most QOFs invest in residential real estate development, followed by commercial development, hospitality, renewable energy, and operating businesses within QOZs. Taxpayers who invest capital gains in QOFs receive substantial tax benefits.
To date, over $160 billion has been invested in QOZs.
The QOZ program was scheduled to end December 31, 2026. The OBBBA has now made it permanent and will create new QOZs and tax incentives for those who invest in them.
The initial regime—QOZ 1.0—will remain in place through 2026. The new regime—QOZ 2.0—begins January 1, 2027.
QOZ 1.0
In 2018, 8,764 census tracts in all 50 states, the District of Columbia, and five U.S. territories were designated as Qualified Opportunity Zones.
These QOZs were mostly in areas with at least a 20% poverty rate. However, 5% of QOZs did not need to be low-income, and nearly 200 QOZs were adjacent to poor areas but not themselves low-income.
Taxpayers who, within 180 days of realizing a capital gain from the sale or exchange of any property, invest that gain in QOFs that undertake projects in QOZs receive three federal income tax benefits:
1. Deferral of Gain
Capital gains invested in QOFs are tax-deferred until December 31, 2026, or until the investment is sold.
2. Exclusion of Capital Gains after 10 Years
If the QOF investment is held for at least 10 years, its basis is adjusted to the fair market value of the investment on the date it’s sold—resulting in zero capital gains tax on profits from the sale.
There is also no depreciation recapture after the basis adjustment.
You can hold your QOF investment until December 31, 2047, and still avoid paying capital gains tax on appreciation.
3. Step-Up in Basis for Pre-2022 Investments
QOF investments made in 2018 or 2019 received a 10% basis step-up after five years and an additional 5% step-up after seven years (up to 15% total exclusion).
QOF investments made in 2020 or 2021 received a 10% step-up after five years.
These step-ups are not available for QOF investments made in 2022 or later.
The QOZ 1.0 zones remain eligible for investment under their original rules through 2026. Capital gains invested in them are tax-deferred only until December 31, 2026, but appreciation on QOF investments held 10 years or longer remains tax-free through 2047.
QOZ 2.0
QOZ 2.0 begins January 1, 2027, and is permanent. A new set of QOZs will be selected under more restrictive rules, with increased incentives for rural areas.
Zones will be redesignated every 10 years.
The first group will be designated by state governors starting July 1, 2026, and approved by the Treasury Secretary.
New QOZs take effect January 1, 2027.
QOZ 1.0 zones remain eligible through December 31, 2028, creating a two-year overlap (2027–2028).
Key point: A 2027 or 2028 QOZ 1.0 investment receives the favorable QOZ 2.0 tax treatment.
Stricter Designation Rules
Fewer total QOZs (about 25% fewer expected).
A census tract qualifies only if:
Median family income ≤ 70% of the state or metro median, or
Poverty rate ≥ 20%.
Governors can no longer designate adjacent tracts that are not low-income.
Rolling Gain Deferral and 10% Step-Up
Taxpayers who reinvest capital gains in a QOF 2.0 zone within 180 days may defer tax on the gain for five years after the investment date.
At the five-year mark, they receive a 10% step-up in basis, eliminating 10% of the taxable gain.
Qualified Rural Opportunity Funds (QROFs)
The OBBBA adds special incentives for investments in low-income rural areas through Qualified Rural Opportunity Funds (QROFs).
A QROF must invest at least 90% of assets in rural QOZs.
A “rural area” means a city or town with a population under 50,000, not adjacent to a city over 50,000.
Taxpayers investing in QROFs receive a 30% step-up in basis after five years.
Substantial improvement test reduced to 50% of the property’s original basis (versus 100% for non-rural QOZs).
Many experts, however, doubt these incentives will meaningfully increase rural investment.
Gain Elimination Limit: 30-Year Cap
Under QOZ 2.0, investors may sell QOF interests tax-free anytime from 10 years to 30 years after investment.
After 30 years, appreciation beyond the fair market value at the 30-year mark is taxable.
This differs from QOZ 1.0, which allows tax-free appreciation through December 31, 2047.
New Reporting Requirements
Beginning in 2027, QOFs must report detailed information annually to the IRS, including:
Total assets held
Value and location of QOZ property
Applicable business codes
Amounts invested in each business
Value of tangible/intangible assets (leased or owned)
Number of residential units and employees
List of investors who dispose of QOF interests
QOZ businesses must provide written statements to QOFs with required data.
Penalties: Up to $10,000 per return, or $50,000 for funds with over $10 million in assets.
The Treasury Department will issue annual public reports detailing participation, investment levels, and project types.
The QOZ “Dead Zone”
Many experts expect a temporary slowdown in new QOZ investments during 2025–2026.
Investments made in this period defer gains only until December 31, 2026, with no basis step-up.
Investing in 2027 or later provides both:
A five-year deferral, and
A 10% step-up in basis.
Investors can still invest in QOZ 1.0 zones through 2028.
Timing note: Gains realized between mid-2025 and early 2026 can still qualify if invested within 180 days. Gains realized after July 5, 2026, can be invested in 2027 and remain eligible.
Takeaways
OBBBA makes the QOZ program permanent. New zones will be designated every 10 years starting in 2027, under stricter income limits (about 25% fewer zones).
Investments from 2027 onward may defer capital gains tax for five years and receive a 10% step-up in basis.
New QROFs investing in rural zones offer a 30% step-up after five years.
Investments before 2027 defer gains only through 2026, with no step-up in basis.
By - W. Murray Bradford, CPA
Publisher Tax Reduction Letter
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