Created by the Tax Cuts and Jobs Act (TCJA) of 2017, Opportunity Zones (OZ) are designed to encourage investors to put money into economically distressed areas. The One Big Beautiful Bill (OBBB), signed into law on July 4, 2025, made Opportunity Zone tax incentives permanent, while also ushering in several changes to the now-permanent program.
If you have existing investments in Qualified Opportunity Funds (QOF), you should be aware of how the new laws may affect you. You should also be mindful of the changes if you’re thinking about investing in an OZ. To get guidance now, contact us at Wiggam Law.
Key takeaways
- Opportunity Zones were temporarily created by the Tax Cuts and Jobs Act and made permanent by the One Big Beautiful Bill.
- Investors can defer capital gains or Section 1231 gains by investing in Qualified Opportunity Funds (QOFs) that hold at least 90% of their assets in Opportunity Zones.
- The OBBB allows investors to defer gains for five years or until they sell their QOF investments, if sooner.
- Gains from QOF investments are not subject to capital gains tax if the investment is held for at least 10 years.
- If QOFs are held for more than 30 years, the investor’s basis is the fair market value on the 30th year after the investment.
- The OBBB created additional tax incentives for investments in rural Opportunity Zones.
How Do Opportunity Zones Investments Work?
Opportunity zones are nominated by state governors, and there are OZs in all 50 states plus five territories. If investors have capital gains from a previous project, they can defer their capital gains tax by investing in a Qualified Opportunity Fund (QOF), an investment vehicle that has at least 90% of its assets in OZs.
The deferral lasts five years or until the date the QOF is sold, if sooner. If the QOF is held for five years, the investor can exclude 10% of their deferred gain.
If the investor holds the QOF for at least 10 years, their basis increases to the fair market value on the day of the sale. In other words, the investor doesn’t have to pay any capital gains tax on the appreciation of the investment. If the investment is held for 30 years, the investor’s basis is the fair market value of the investment on the 30th anniversary, which has the potential to substantially reduce capital gains for investors who hold these investments for decades.
This description is based on the updates to OZ tax incentives created by the OBBB. OZ investments made under the rules created by the Tax Cuts and Jobs Act (TCJA) may be subject to different terms. Consult with a tax advisor for guidance tailored to your unique situation.
OBBB Changes to Opportunity Zone Investments
The OBBB made several changes to OZ investment requirements, including how gains are deferred and taxed upon the sale of QOFs. Here’s an overview of some of the most significant changes, but keep in mind that this is not an exhaustive list.
Consult with a tax professional to learn more about how the OBBB affects your investments:
New Opportunity Zones
The original list of OZs was scheduled to expire at the end of the tax year 2028, but the OBBB has moved this date up to December 31, 2026. At that point, the government will create a new set of OZs, and moving forward, state governors will select new OZs every 10 years. Governors will nominate new zones starting on July 21, 2026, and they will be ready for investment on January 1, 2027.
Tighter OZ eligibility criteria
The OBBB requires OZs to have a median income of 70% or less of the state’s median. Previously, the threshold was 80% of the state’s median. Also, under the TCJA, governors could designate areas as OZs if they were contiguous with low-income communities, but the OBBB eliminated that option.
New rolling five-year period for deferred gain recognition
Investors must recognize deferred capital gains five years after their OZ investment date, unless they sell their investment in the QOF before that date. Prior to the OBBB, deferred gains were realized on the earlier of December 31, 2026, or the date of the QOF sale – this deadline still applies to OZ investments made under the TCJA rules.
Creation of Qualified Rural Opportunity Funds
The OBBB created QROFs, defined as QOFs that have 90% of their assets in qualifying rural areas, to encourage more investments in these areas. The OBBB defines rural areas as any area with fewer than 50,000 residents, excluding areas that are contiguous with cities or towns with more than 50,000 residents. For example, a town with 40,000 people that is not contiguous with another populated area is considered to be rural. However, a suburb with 40,000 people that is contiguous with a city that has more than 50,000 people is not considered to be rural.
Increased exclusion of deferred capital gains for investments in rural areas
Investors who put capital gains into rural OZs can claim a 30% exclusion of their deferred capital gains as long as they keep the investment in the QOF for at least five years. In contrast, investors in non-rural areas can only exclude 10% of their deferred capital gain if they hold the QOF investment for at least five years.
New rules about substantial improvements in rural areas
To qualify for the tax benefits related to OZ investments, investors in rural real estate only need to invest 50% of an existing property’s basis into improvements in the first 30 months. Prior to the OBBB, substantial improvements were defined as 100% of basis in the first 30 months – this threshold still exists for non-rural investments. Note that the other TCJA terms and exceptions still apply. For example, substantial improvement does not apply to investments in original use projects, and there are safe harbor rules for multi-building projects.
Gain elimination frozen after 30 years
Under the OBBB, gains are frozen after 30 years. That means that if you sell your QOF investment before you’ve held it for 30 years, you get to use the investment’s fair market value on the day of the sale as your basis, which eliminates capital gains. But if you hold it for over 30 years, you use the fair market value on the 30th anniversary as your basis.
The new rolling 30-year deadline is a change from the TCJA, which terminated QOZ benefits for QOF sales after December 31, 2047. That deadline has been eliminated for all OZ investments.
Elimination of the 15% exclusion
Under the TCJA, investors could claim up to a 15% exclusion on their deferred capital gains if they held the QOF for at least seven years. The OBBB eliminated this exclusion level.
New reporting requirements
Under the OBBB, QOFs are required to report total assets, value of QOZ property, NAICS business codes, QOZ census tracts, amount invested in QOZ business property (QOZBP), value of tangible and intangible property, number of residential units owned, number of full-time employees, and investor dispositions of QOF interests. Failure to file accurate reports can lead to penalties of up to $10,000 per return (up to $50,000 for QOFs with over $10 million in assets).
The OBBB also created new reporting requirements for the government. The law requires the Treasury Secretary to report the amount of money invested in OZs, the percentage of OZs that have received investments related to this program, how much money was invested in each area, the number of employees employed by OZ-financed businesses in each area, and the number of residential units built as a result of OZ projects. Starting in 2031, the Treasury is also supposed to report on the economic conditions of each area – for example, job creation, poverty reduction, and new businesses spurred by OZ investments.
Who Benefits From the OBBB’s Changes to the OZ Tax Incentives?
There are numerous benefits to OZ investments, and the following taxpayers may benefit from the updates to OZ funds.
- Long-term real estate investors seeking capital gains deferral or exclusion.
- Developers focused on real estate projects in Opportunity Zones.
- Small business owners operating in Opportunity Zones.
- Fund managers and advisors who help clients structure QOF investments and meet compliance standards.
- Residents of Opportunity Zones, especially in rural areas – theoretically, residents and business owners in these areas are supposed to benefit from the increased investments into their communities.
What Stays the Same Under the OBBB?
The OB3 left several of the TCJA’s provisions related to OZs intact, including the following:
- Qualifying deferrals — investors can put capital gains or Section 1231 gains (from selling certain business property) into Opportunity Zones and defer the gains.
- 180-day window — investors must put the funds into an OZ within 180 days of when they cashed out their original investment.
- 90% asset test – QOFs must have at least 90% of their assets in an Opportunity Zone area.
- Substantial improvement test – unless developed for original use, real estate investments must involve substantial improvements that are 100% of basis (50% in rural areas) within 30 months.
- OZ business income – to qualify for OZ tax benefits, businesses must earn at least 50% of their gross income from activities in the Opportunity Zone.
- Filing requirements – taxpayers must file IRS Form 8997, Initial and Annual Statement of Qualified Opportunity Fund (QOF) Investments; QOFs must file IRS Form 8996, Qualified Opportunity Fund.
FAQs on OZs Under OBBB
When does the new Opportunity Zone investment window close?
The OBBB made Opportunity Zones permanent. Investors can put money into these investments at any time. However, if an investor wants to defer capital gains, they must invest within 180 days of incurring the capital or Section 1231 gains.
How long can investors defer capital gains under the OBBB?
Under the OBBB, investors can defer capital gains for five years or until they sell their QOF investment if sooner. For example, if you invest in a QOF on April 1, 2027, you can defer your capital gains until April 1, 2032.
All QOF investments made under the TCJA rules were deferred until December 31, 2026, or the date of the QOF sale if sooner. That deadline is still in place for these investments.
What new reporting rules apply to Qualified Opportunity Funds?
The OBBB requires QOFs to report amounts invested, the type of property involved, and several other details. QOFs who fail to report may be subject to intense penalties.
Are there new types of projects eligible for Opportunity Zone investment?
Yes, the government will roll out a new list of Opportunity Zones in July 2026. The list will be updated every 10 years.
How can investors verify whether a project is located in a designated Opportunity Zone?
The IRS has links to qualifying Opportunity Zones. Check with the agency for updated guidance, or consult with an experienced tax professional before making this type of investment.
Are Opportunity Zone investments made before the OBBB subject to the OBBB’s new rules?
Investments made before the OBBB was signed into law are not affected by the new rules on which areas are defined as Opportunity Zones. They’re also still subject to the December 31, 2026, deadline and not eligible for the rolling five-year deferral window. However, older investments can benefit from the gain elimination freeze after 30 years, as the original December 2047 deadline was eliminated.
Do I lose step-up basis if I sell my investments after December 31, 2047?
No, the OBBB eliminated the December 31, 2047, deadline. Under the new rules, all OZ investments enjoy a 30-year rolling window, which means that the basis is frozen as the investment’s fair market value on its 30th anniversary.
Contact Wiggam Law for Representation During Tax Disputes
If you’re investing in an Opportunity Zone, make sure that you vet the fund carefully. Unfortunately, QOF disputes may lead to the IRS revoking the QOF’s status or deciding that your OZ investment was not legitimate, exposing individual investors to unexpected capital gains taxes.
To protect your capital, contact a legal team with extensive OZ experience like Wiggam Law.
At Wiggam Law, we leverage our experience to help our clients get the best outcomes possible, but we also customize our approach to each case because we know that every situation is unique. We’re always learning and adjusting our approach so that we can help clients deal with tax code updates, including OBBB changes to tax on overtime, 1099 reporting, limitations on gambling losses, and more. Don’t wait – contact us for help today.
Sources:
https://www.irs.gov/credits-deductions/businesses/opportunity-zones
https://www.brookings.edu/articles/how-did-the-one-big-beautiful-bill-act-change-opportunity-zones/
