There was little question that some form of the opportunity zone (OZ) tax program benefits would be included in the new legislation as the OZ program was one of the more notable provisions of 2017 Tax Cuts and Jobs Act (TCJA) and initially had bipartisan & bicameral support. The OBBBA introduces significant updates to the opportunity zone program, including making it a permanent fixture of the tax code and expanding the benefits available to investors.

Given the overall support, it remains highly unlikely that this portion of the tax code, encouraging investments in economically distressed areas, would be repealed in future legislation. This permeance offers significant opportunities for investors, with the ability to generate capital gains, to plan utilizing  the significantly available OZ tax benefits and required holding periods.

Quick Takeaways

• The legislation eliminates the sunset of the original OZ program (originally 12/31/2026) and introduces new 10-year review/designation process for opportunity zones in each state based on updated definitions of qualifying zones.
• Investors can once again receive the benefit from gain deferral (5-year rolling deferral period), basis step-up (10%) and tax exclusion provisions (10-year investment hold) of the program.
• The focus of the program has shifted toward rural investments including the creation of Rural Qualified Opportunity Funds “RQOFs”.
• Missing these changes could result in lost tax advantages or delayed investment on new OZ projects.

What’s in the 2025 OBBBA?

1. New Zones on the Way

Governors will be able to propose new qualified zones every 10 years starting from July 1, 2026.

• This gives investors a short time period to evaluate the zones for potential opportunities . They will need to have their investment plans and deal structures ready for the January 1, 2027 program start date.
• Eligibility criteria have been tightened to better align with the program’s goals, meaning fewer zones will qualify during the initial redesignation period.

2. Changes in Investment & Deferred Recognition Time Periods

These changes are applicable for gains invested after January 1 2027. Gains timely invested (within 180 days of recognition) will now be deferred for a 5-year rolling period. 

• The original OZ provisions with a specific fixed deferral date (initially 12/31/26) no longer work because of the program permanence.
• All timely invested gains will now be deferred for a 5-year tax period from the date invested. Any gains deferred in the initial year of the program will be deferred and recognized in 2032, unless the OZ investment is sold earlier.

3. Basis Step-Up and Exclusion Upon Exit

Investments that meet the 5-year holding period requirements will again receive a 10% step up in basis. (i.e., only 90% of the initial deferred gain will be recognized for taxation after the 5-year deferral period.)

Investors will be able to exclude gain on the appreciation of the initial Investments in QOFs or QROFs after a 10-year period and upon exit. (i.e., if the initial deferred gain was $1 million and after a 10-year period has a value of $3 million then $2 million dollars would not be subject to capital gains tax upon exit).

• Gain exclusions include gain that would be subject to depreciation recapture. This is especially important given the OBBBA increased to bonus depreciation and Section 179. The savings here can be substantial.

4. Increased Rural Focus

At least 33% of new OZs designated would be required to be located in rural census tracts defined in the Consolidated Farm & Rural Development Act. Thus shifting some focus away from urban markets that were utilized in the first program. Investments in these zones would be considered Rural Qualified Opportunity Funds “RQOFs.

• RQOFs allow a basis step-up of 30% if held for 5 years as compared to the standard 10%.
• RQOFs have a reduced substantial improvement requirement for investments to acquired property located in a rural zones to 50% of the adjusted cost basis (100% for traditional QOFs).

5. Tougher Eligibility Standards & Reporting Requirements

• Newly designated OZs must meet stricter income thresholds, reinforcing the goal of targeting economically distressed areas.
• New reporting requirements apply for QOFs and QROFs, including:
  • Type of investment asset
  • OZ tract location
  • Number of full-time equivalent employees

What Should Real Estate Investors Do Now?

Although the provisions don’t start until 2027, it’s wise to begin scenario planning now:

• Review current OZ investments and how the 12/31/2026 recognition date (under OZ 1.0) could affect exit timelines and gain recognition.
  • Now is an ideal time to harvest capital losses for carryforward use and assess the impact of other real estate investments on your 2026 tax outlook. Consider the interaction with OBBBA provisions like increased bonus depreciation and limits on interest expense.
• Evaluate rural development strategies that may become more attractive including smaller housing projects, infrastructure, and community centers for healthcare, etc.

Other Notable Provisions:

1. Current Opportunity Zones Keep Their Designation Until 12/31/2028

2. No Funds of Funds Investments

There were significant requests from participants in the first OZ program for qualified opportunity zone funds “QOFs” to be able to invest in other QOFs. This provision is notably missing from the new legislation and

3. No Ordinary Income Investments

Additional requests were made to allow for non-capital gain income to be used for investment (so called democratization of the OZ program). These will continue to be ineligible for investment and investors must have capital gains subject to federal tax to be able to participate & defer.

4. Sale of QOF Assets Prior to the 10-year Holding Period

Under the prior program there was a 12-month deferral of gain from sale of underlying OZ assets if those gains were reinvested by the fund. This provision is noticeably absent, but investor may use that gain to make investments in separate opportunity zone funds.

5. “Hibernation” Period for OZs

With these new benefits not being available until 2027, businesses/investors will likely try to delay investments to align with the additional benefits, and timing of gains during this period will be critical. 

Stay tuned: The IRS will need to issue specific regulations on the operation procedures of the new legislation which will provide more insight on the individual provisions outlined in the new law.

Looking for a full breakdown of how the OBBBA impacts business taxes beyond Opportunity Zones? Read our overview of key changes for business owners here.