The One Big Beautiful Bill Act makes the opportunity zone program permanent and also introduces some changes in the real estate investor tax breaks, creating a new category for qualified rural opportunity funds and requiring states to designate opportunity zones every 10 years.
States will need to adjust to the new designation cycle, and there may be some confusion at first. Under the original legislation that created opportunity zones, the Tax Cuts and Jobs Act of 2017, the zones were designated a single time and set to expire. The OBBBA creates a permanent, recurring cycle to ensure OZs stay relevant given current economic conditions.
"The redesignation cycle will begin starting July 1, 2026, for the governors in states and the cities to redesignate those areas," said Dannielle Lewis, a partner in the tax practice at Wipfli Advisory in Minneapolis. "But I would say there are already plenty of constituents in each of the states promoting their different opportunity zone tracts that they believe will meet the criteria so it's elevated when the tract designation process officially starts in July of next year. Then after that, the new tracts will start Jan. 1, 2027 and, because of that, there's going to be a weird interim time where we have current tracts designated under OZ 1.0 that will still be effective all the way through Dec. 31, 2028, so we'll have kind of this limbo where there's both tracts in OZ 1.0 and OZ 2.0."
There are other differences as well between the two programs, including the thresholds for median family income within the zones that allow them to qualify, in response to complaints that the program was benefiting developers who were investing in areas that were already considered attractive. Opportunity zones are supposed to help with development in low-income communities. Under the original OZ program in the 2017 tax law, areas could qualify as opportunity zones if their median family income didn't exceed 80% of the greater of the statewide or metropolitan statistical area's median family income. Under the OBBBA, the percentage was lowered to 70%.
"They've essentially narrowed the tracts that are able to qualify for it," said Lewis. "Before, it was 80% of median income, whereas now it is 70%. There was a lot of angst about the OZ tracts that were picked the first time, saying that maybe they were in areas that are gentrified, or something like that. They're trying to combat those issues with this designation, so they've kind of narrowed the perspective. There are maps available that you can go online and check to see whether or not the tract you want to invest in will be one for 2027, but none of them have actually been picked."
However, the changes have also led to hesitancy for investors and developers. "The biggest issue that we're having right now is people who are in limbo about projects, where they know for a fact that the project that they want to do is in an OZ 1.0 tract. They want to start it now, but a lot of the benefits are going to be tied up with OZ 2.0. It's better for them to wait two years to essentially start it, but we don't know what the world's going to look like in two years. So is it better to punt the project, or move forward with it now with these weird limbo rules?"
Some investors are taking a wait and see approach. "There is a lot of uncertainty as the new version of the statute does not go into effect until 2027," said Dan Ryan, a partner at the law firm Sullivan & Worcester in Boston. "We also do not know where the new opportunity zones will be as they will not be designated until some point in 2026 or 2027. Where the new zones are will strongly influence the level of investment and use of the program."
The changes are causing some investors to hold off until 2027 when they can get bigger returns on their investments. "Under the new program, people who invest their capital gain in funds after Jan. 1, 2027 will get additional benefits that if you invested right now into an opportunity zone fund you would not receive, so it's a better investor situation if you could essentially wait for 2.0," said Lewis.
The upcoming changes are prompting investors to hold off until Jan. 1, 2027 to start raising capital for their projects, or even start their projects, she noted. "We've also seen people timing their gain recognition to be later in 2026 so they could defer it under the OZ 2.0 rules," said Lewis.
The Internal Revenue Service is also expected to ease some of its reporting requirements. "I would say streamlining in a sense," said Lewis. "They're not going to be requiring things that I would say should have always probably been required, like information between the QOZB [qualified opportunity zone business] and the QOF [qualified opportunity fund]. The QOF requires certain information from the QOZB, but if they're only related by cash, so they're only an investor in it, they're not actually active in the entity. What we found is they often weren't reporting the information that the QOF needed to report on their tax return, so some of those issues will be resolved, and that will be more of a required reporting."
The IRS has not yet drafted the new form, so it's unclear how much will be required. "We don't know what the form looks like yet, but it's nothing too cumbersome," said Lewis. "It's more like the NIC [National Industrial Classification] codes for what trade or business they're in, [for] the census tract, which was already kind of included there. If it's residential, you have to include the amount of units. And if it's like a true operating business, the amount of full-time employees that are invested there, essentially so that they can put a package together to say, here are the opportunity zones and the different ways that they help the community."
She doubts this type of information would raise a red flag for the IRS on a taxpayer's tax return, but is more for data-gathering purposes so policymakers can understand the impact of the opportunity zones.
Accounting firms can assist clients in adjusting to the new rules and taking advantage of the substantial tax breaks for investors. "I would say a CPA firm's role in this is either helping clients who have capital gain figure out when they can invest it, or if they're actually helping on the qualified opportunity zone fund, it's a lot of the upfront structuring, because if you miss one step, it's really hard to fix," said Lewis. "We do a lot of work around the structuring of it, making sure all the compliance and the rules will be met under the federal regulations."
The original opportunity zone program faced
"The program originally had bipartisan support, and I would still say it does, but had a lot of contention afterward because a lot of places that had a lot of opportunity zone tracts were based on 2012 census data, but they were not necessarily low-income census tracts anymore in 2018," said Lewis. "I think they were really trying to address that issue and not make headlines for it this time around and really focus, particularly because they now have new tracts for rural opportunity zones and have reduced the requirements. I know at least one project that I saw investors trying to do in a rural area under 1.0 was just not feasible if you had to double the basis in the property, and it usually also was not feasible to do ground up construction. Rural areas really missed out, whereas under the new rules you only have to substantially improve 50% so that should hopefully help a lot of those rural areas actually get the benefit of OZ dollars."
The OBBBA includes an enhanced 30% basis step-up on deferred gains after five years in rural areas and reduced the "substantial improvement" requirement for properties in rural opportunity zones from 100% to 50% of the property's basis.
"There are benefits especially for investors in rural areas beginning in 2027 as investors must invest 50% less than urban investors or investors under the prior version of the statute," said Ryan. "There are also potential tax savings for current investors to reduce the capital gains tax that is due in 2026 depending on the valuation of the investment."
The IRS has already released some
Lewis believes states need to do further analysis. "Determining whether a state should decouple from opportunity zone provisions requires a thorough benefit–risk analysis," she said. "States depend on sustained capital investment to generate tax revenue and support population growth. If the analysis indicates that decoupling would result in greater revenue loss than potential gains, states might consider implementing their own regulations or qualifications for QOFs to better align with local priorities. Ultimately, if an investment makes sense for an investor, the federal benefit will likely remain the primary driver of their decision."
Current economic conditions will clearly be an important factor in opportunity zone investments. "It's also important to recognize that data from OZ 1.0 is largely self-reported and limited, making it difficult to draw definitive conclusions," Lewis added. "Furthermore, the program's initial rollout coincided with the onset of COVID-19, which significantly disrupted economic activity. As a result, many OZ 1.0 projects never progressed beyond the planning stage."
