Real estate investors who have taken advantage of the opportunity zone program may be facing hefty tax bills on their long-deferred capital gains at the end of this year unless they do some careful planning.
Opportunity zones were introduced as part of the Tax Cuts and Jobs Act of 2017 as a way to encourage investment in low-income communities, while offering tax benefits to real estate investors. The program was later
In June, the IRS and the Treasury Department issued
However, there's still a hitch for some investors because, as they face the Dec. 31 deadline, they may discover their opportunity zone reporting forms for the prior year were either incorrect, incomplete or missing, possibly resulting in significant tax and financial reporting implications even when the investment itself otherwise met the program's requirements.
"Everybody that we've been speaking with is just incredibly excited that the opportunity zone program was made permanent and extended," said James Montague, director of real estate and infrastructure tax at PwC US. "I think it will be hopefully a positive thing for some of these low-income communities. A lot of the changes, specifically on the tightening of the requirements of which tracts are eligible, definitely will help to strengthen the program overall and make sure that these OZ dollars are going to the communities that must need them. A lot of what we've been seeing right now has been related to thinking about how these OZ 2.0 funds will work, trying to identify investments, balancing some of the new guidance that we've gotten on transition rules, as well as the overall identification of the new tracts, which is going on right now. It's a very interesting time to be dealing with opportunity zones, especially as we get toward the end of the 1.0 program at year end."
A recent
"Some states said it led to increased job growth and housing in their communities, but most were unsure about the incentive's overall effects," said the report.
Approximately 20% of states cited increased job creation and housing as effects, according to the GAO. The report pointed out that Congress made the opportunity zone incentive permanent in the OBBBA and added new reporting requirements that could help identify economic impacts, while adding more of an incentive to invest in rural areas.
"I do think that the changes that were made in the One Big Beautiful Bill, especially around the expanded reporting requirements, both for opportunity zone funds and for Treasury, are really going to help people get a better sense of how well this program is working," said Montague. "Previously, there were reporting requirements for [Qualified Opportunity Funds], really just focused on the value of the property located within the zone. The new requirements around things like the number of residential units and employment details will definitely help to strengthen some of the impact analysis. One question that we think is still open in terms of guidance from Treasury is just how that information will be collected, whether there will be thresholds in terms of whether you need exact numbers. The data collection element of that is definitely something that is top of mind for clients, just because that turns on for the 2026 tax year. Hopefully that will be addressed in some way in the proposed regulations that we're hoping for by the end of this year. On top of that, I do think that having a requirement for Treasury to analyze this information that they're collecting on a more recurring basis will provide some additional detail as well."
In July, PricewaterhouseCoopers sent a
"As part of a "straight-to-final" regulation (that is, a regulation not issued in proposed form for public notice and comment), a fund investor who has satisfied every statutory requirement for capital gain deferral and exclusion under the Opportunity Zone tax incentive can be forced to recognize the entirety of that gain and forfeit all other Opportunity Zone tax incentives — solely because of an incorrect, incomplete, or missing reporting form," PwC wrote. "This regulation provides only two options for the statutorily compliant fund investor to avoid immediate gain recognition and forfeiture of all Opportunity Zone tax incentives. The first option requires the fund investor to (i) amend its entire Federal income tax return (for a two-page reporting form) or (ii) file an administrative adjustment request with the Internal Revenue Service. Each choice under this first option is punitive, as each imposes significant, unnecessary costs and other burdens on statutorily compliant fund investors and can ultimately impact the financial reporting of large investors. The second option refers to a process through which a fund investor can demonstrate to the satisfaction of the Commissioner that, regardless of an incorrect, incomplete, or missing reporting form, they are eligible for the Opportunity Zone tax incentives. Currently, no guidance has been provided on how a fund investor can meet this requirement."
Aside from the reporting requirements, one of the main criticisms since the OZ program was introduced was that many of the projects seemed to be in areas that were already receiving investment and gentrifying, while enticing relatively little investment in areas where there was high poverty. The changes under the OBBBA may spur more investment and development now in distressed communities.
"I think things will move more toward those underserved areas," said Montague. "One of the big changes in terms of tightening the tract requirements was Treasury got rid of the ability to designate contiguous census tracts. Under the 1.0 program, qualified opportunity zones could be a low-income community, or it could be a tract that was contiguous with a low-income community, not necessarily a low-income community itself. There weren't many tracts that fell into that category, but they were out there. Getting rid of those certainly helps to direct investment toward more of these low-income communities that actually need the investment, and they also tighten the median family income requirements and the poverty thresholds. Overall there is a targeted effort to make sure that these dollars are going where they need to be going. The rural benefits certainly won't hurt either. Still, it's a little bit too soon to say how impactful that benefit will end up being."
Opportunity zones are first nominated by state governors, but those tracts need to be reviewed before they're approved by the Treasury and the IRS. The designation period for the new tracts began July 1.
"That period by default is set to run for 90 days, which takes us to the end of September," said Montague. "The governors do have an option to extend that for another 30 days. From there, that's when Treasury then needs to go in and say whether the nominated tracts are actually eligible for designation, and then go about certifying those. Based on a
In the meantime, opportunity zones are providing significant capital gains tax breaks to investors, but clients should stay abreast of the latest changes..
"It's a mix of two incentives that people are still most interested in," said Montague. "Overall the deferral still attracts people as part of the 2.0 program. Obviously, there's not much benefit to deferral right now if you make an investment early in 2026, given that you can fully defer up until the end of the calendar year, but I do think the deferral period is something that's attractive to people. The 10-year exclusion incentive seems to be the biggest driver in terms of attracting new investments into QOFs. I think that will continue to be the case. For the most part, that remained largely untouched by the One Big Beautiful Bill. There were some changes to the way that incentive works for significantly long-term holds. Previously, if you held your investment up until 2047, you would essentially lose that benefit going forward. Now, if you've held your investment for 30 years, you're just locked into whatever the fair value step-up would be as of that 30-year period. It's a slightly different approach, but an overall more favorable approach since it doesn't just disappear completely. But the long-term hold is still one of the primary drivers for investment."
Some investors may be attracted to the new rural tracts as well. 'We are seeing interest in the rural opportunity zones," said Montague. "It's been less what we think of as traditional fund sponsors, just because a lot of the investments don't necessarily seem to satisfy the overall requirements and appetites that they would have. We are seeing a little bit more in terms of one-off investments, and some less traditional types of deals, a lot of interest in renewable assets and things like that. There's definitely interest in the rural tracts. I think the one challenge that we're seeing is that it really does become almost an all or nothing, and you need a specific vehicle just for the rural investments."
In order to qualify for the investor-level rural benefit with the 30% basis step-up, a Qualified Opportunity Fund needs to hold at least 90% of its investments in rural tracts, he explained, so investors need to have a focused rural strategy.
"For your other Qualified Opportunity Funds, they could invest anywhere within a zone, but they'll only be eligible for the 10% basis step-up," said Montague. "Right now, based on the way that the law is written, there's no averaging of that. It's not like you get somewhere in the middle if you hold more rural than non-rural. It's basically all or nothing, so you either get the 30% or the 10%, and there's no in between."
Firms like PwC are awaiting further guidance from the Treasury on the reporting requirements. "The big thing from a fund perspective is around these new reporting requirements," said Montague. "While we received some additional guidance a couple of months ago, with
That may mean investors will need to do a great deal of last-minute scrambling to either get those zones redesignated or close out their investments unless the Treasury changes the final rules in its guidance.
"It's still too soon to say," Montague noted. "There have been a number of comment letters that we've seen, where this has been a large focus, in terms of the potential to push this sunsetting back to 2028. But I do think that is an area that people will be looking for guidance for as the proposed regulations come out."
Accountants should advise their clients about the changes in the rules and the upcoming deadlines.
"I think the most important things as advisors are working with their clients around opportunity zones would be really just making sure that everybody is aware of the timing," said Montague. "I had a client say that they had made an investment in late December of 2025, and because of the way that the rules work, the investment ended up falling outside of the 180-day period. Make sure that you're aware of all the timelines associated with the gain deferral mechanisms to get into a Qualified Opportunity Zone fund, and then also just make sure that you're getting into a structure that is planned to work within the requirements, and make sure that you're really just going ahead and checking all the boxes and filing all the forms that you need to. There are a lot of specific requirements on opportunity zones, whether you're the fund having to file your annual Form 8996, or your investors that are having to file their annual 8997's. For investors that are currently in Qualified Opportunity Funds, especially as we get toward the end of the 1.0 deferral period, it's really critical just to make sure that all the documentation is aligned."
