Important Note: The House has passed a budget reconciliation bill with major proposed changes and updates to the Qualified Opportunity Zone (OZ) program. These provisions are not yet final as Senate negotiations are underway, but real estate investors should take note of what's on the table.

Quick Takeaways

• The Bill could accelerate the end of the current OZ program to 2026 on investments in existing zones.
• A new round of OZs may begin in 2027 with additional eligibility rules.
• The focus could shift toward rural investments.
• It affects how and when investors can defer capital gains.

Missing these changes could result in lost tax advantages or delayed investment on new OZ projects.

What’s Proposed in the 2025 Budget Bill?

If enacted, the following changes would reshape the Opportunity Zone landscape:

1. Early Sunset of Current OZs
The expiration date for existing QOZ designations would move from December 31, 2028, to December 31, 2026, shortening the window to participate in the original OZ program and fund existing deals.

2. New OZ Designations from 2027 through 2033 
A fresh round of OZs could be designated starting January 1, 2027, and would potentially allow a new round of investment opportunities until December 31, 2033

3. Increased Rural Focus
At least 33% of new OZs would be required to be located in rural census tracts, shifting some focus away from urban markets. These new rural zones would allow an additional basis step-up of 30%. There could also be a reduction in the development requirements for acquired property located in a rural zones to 50% (100% previously).

4. Extended Capital Gains Deferral and Basis Step-Up
Investments in the new OZs could allow for deferral of capital gains through timely investments until 1/1/2034. There is a 10% basis step up for investments after 1/1/27 and prior to 12/31/28.

5. Ordinary income Investments.
Ordinary Income (wages, investment income) may now be permitted to be used for investment into opportunity zone funds. The current proposed investment would be capped at $10,000. Previously only capital gains dollars were eligible for investment purposes.

6. Tougher Eligibility Standards & Reporting Requirements
New OZs would need to meet stricter income thresholds, tightening the criteria to better align with the original goal of targeting economically distressed areas. This new legislation could likely also include additional reporting requirements for investments and opportunity zone funds.

What Should Real Estate Investors Do Now?

Although the bill is not yet law, it’s wise to begin scenario planning:

• Review current OZ investments and how a 2026 sunset might impact exit timelines and recognition of deferred gains.
• Evaluate rural development strategies that may become more attractive if the new rules pass.
• Pause new OZ investments unless they are short-term or aligned with the current program’s end date.

A “Hibernation” Period in 2026?

Because the current program could end in 2026 and OZ 2.0 wouldn’t begin until 2027, businesses/investors may face a one-year gap where OZ investment activity is limited, and timing of gains will be critical. Planning ahead for this potential freeze is critical.

FAQ- Potential Changes to OZs

1. Are the changes to the OZ program already law?
   No, they are part of a House-passed bill and must still be reconciled with the Senate version.
2. Will previously invested OZ funds still qualify for tax benefits?
   Yes, as mentioned any deferred gains from the initial program will need to be recognized in 2026. Any investments in current zones can continue to exist and be held until the 10-year holding period is met to obtain the basis step up benefits of OZ 1.0.
3. How do I prepare if I’m considering rural developments?
   Start assessing potential census tracts, infrastructure readiness, and industries that align with the stated push for these areas including warehousing, manufacturing, energy sector, etc.

Stay Tuned – This summary highlights key proposed changes to the Opportunity Zone program included in the House-passed budget reconciliation bill. However, the legislation is not yet final. The House and Senate must still reconcile their versions, and ongoing negotiations, particularly around issues like SALT deductions and overall spending levels, could result in revisions or delays to the OZ provisions. We’ll continue to monitor developments and provide updates as the bill progresses.