The One Big Beautiful Bill Act (OBBBA) makes permanent the Qualified Opportunity Zone (QOZ) tax provisions. The program’s tax deferral and basis step-up benefits are enhanced for new investments made after December 31, 2026.
The new QOZ rules remove the uncertainty surrounding the program’s future, giving investors and developers clear and lasting guidance for deploying capital. The updates and permanency should encourage sustained investment and shift focus to the newly incentivized rural zones. With the original QOZ law set to expire at the end of 2026 and the new provisions from the OBBBA not taking effect until 2027, developers of QOZ projects will likely delay new investment and projects until 2027.
How QOZ Tax Incentives Work
The original program for QOZ investments stems from new IRC section 1400-Z enacted by the 2017 Tax Cuts and Jobs Act (TCJA). Investors could defer tax on capital gains by reinvesting it into a Qualified Opportunity Fund (QOF). The deferred gain was then subject to a basis adjustment (and a reduced portion of the gain that is taxed) depending on the holding period.
A 10% basis increase applied if the QOF investment was held for at least five years, and a 15% basis adjustment applied if held for seven years. Appreciation on the QOF investment remains entirely exempt from federal tax when it is sold. However, because the deferred gain became taxable on December 31, 2026, the deadline to receive any benefit from these holding period basis increases and reduced gains ended on December 31, 2021.
As the tax regulations applying to QOZ investments were complex and slow to develop, there were limited opportunities to take advantage of the basis adjustment on the deferred gain, particularly the 15% adjustment.
For investors in QOZs between 2018 and 2026, deferred gains will be recognized in the 2026 tax year and the tax burden due by April 15, 2027.
The OBBBA modifies the tax incentives to simplify the benefits and reflect the newly permanent status of the tax benefit. For investments made after December 31, 2026, taxpayers may defer capital gains taxes owed on their initial investments for fi ve years. The initial investment will continue to be eligible for a 10% basis step-up at the five-year mark. However, the OBBBA eliminates the additional basis step-up at the seven-year mark.
The OBBBA maintains the tax exclusion on new capital gains generated by a qualifying investment held at least 10 years. If the investment is held longer than 30 years, the stepped-up basis will be frozen at the fair value of its 30th anniversary.
Qualified Rural Opportunity Funds (QROFs)
To better direct capital to underserved areas, the new law created a category for Qualified Rural Opportunity Funds (QROFs). These are funds that invest in developments in rural areas defined as any city or town with a population less than 50,000, excluding census tracts adjacent to a town or city with more than 50,000 people.
Initial investments in QROFs will receive a 30% step-up basis adjustment after five years instead of the 10% increase. The OBBBA also reduces the substantial improvement requirement for rural investments, which otherwise requires QOFs to improve existing property by more than 100% of the property’s original basis. Properties located in eligible rural areas are eligible for a reduced 50% threshold for substantial improvements.
Reporting Requirements and Compliance
The OBBBA also includes new reporting requirements for QOFs, including the type of qualifying property, number of residential units, value of total assets, number of employees and which QOZ census tracts the fund invests in, among others. Failure to comply may result in fines up to $10,000 per return or $50,000 for funds with over $10 million in assets.
QOZ Redesignation and Eligibility
State governors will redesignate QOZs every 10 years. Beginning on July 1, 2026, new QOZ designations should be made within a 90-day period, subject to approval by the Treasury secretary. The designations will take eff ect for investments in those zones on January 1, 2027.
Eligibility is based on a census tract meeting either of two criteria:
- Low-income community: The area does not exceed 70% of the relevant median income (down from the 80% threshold in 2017).
- Poverty rate: The tract has at least 20% poverty, with income levels not greater than 125% of the area median income.
Long-Term Benefits for Investors
For investments held for at least 10 years, any appreciation in the value of the QOF investment is entirely exempt from federal capital gains tax when sold. The tax-free treatment after 10 years is particularly powerful, because it also eliminates depreciation recapture, which is subject to higher tax rates in traditional real estate transactions.
James M. Philbin
CPA, Managing Director
CBIZ
53 State St. 17th Floor
Boston, MA 02109
