Opportunity Zones 2.0: What is new 

The Opportunity Zones program, established through the Tax Cuts and Jobs Act, is now a permanent program thanks to the One Big Beautiful Bill Act (OBBBA). The updated Opportunity Zone framework, known as OZ 2.0, continues to encourage long-term private sector investments in low-income communities nationwide.

Investors in Qualified Opportunity Funds (QOFs) operating within the designated Opportunity Zones (OZs) can continue to take advantage of federal tax benefits in exchange for their contribution to economic growth and investment in newly designated distressed communities.

Any entity or individual required to report capital gains can receive Opportunity Zone benefits. This includes individuals, C corporations (including regulated investment companies and real estate investment trusts), partnerships, S corporations and trusts and estates.

For project sponsors, the program may also help accelerate capital formation, reduce capital cost, fill gaps in the capital stack and enhance other federal tax credit transactions. The program applies to varied asset classes, project types and operating ventures.

A new provision incentivizes investment in rural areas. Funds that hold 90% of their Qualified Opportunity Zone Property (QOZP) assets for substantially all of the QOF’s holding period in a rural area are designated as Qualified Opportunity Rural Funds (QORF) [1]. Investors in QORFs receive two additional benefits compared to a standard QOF investment. Investors that own an QOF investment for five years in a QORF will increase the basis in their deferred gain investment by 30% (compared to QOF investment that will increase the basis of the deferred gain by only 10%).

Under OZ 2.0, investments in QORFs require only a 50% increase of the basis to be deemed “substantially improved,” compared to QOFs that require a 100% increase of the basis to be deemed substantially improved.

How it works

The OZ program offers federal tax incentives for investing unrecognized capital gains in QOFs, which are investment vehicles created specifically for these purposes. The amount of benefit ultimately recognized depends on the holding period of the investment.