Nov. 6, 2025 · Authored by Colin J. Walsh, Zeinat Zughayer
The One Big Beautiful Bill Act (OBBBA) (P.L. 119-21) made the Opportunity Zone (OZ) program permanent. The OBBBA also made several changes to the OZ program, most of which will not impact taxpayers in the near future. However, the following should be considered during 2025 year-end planning.
1. New zones – effective Jan. 1, 2027
By July 1, 2026, each state will create new Opportunity Zones (OZ 2.0 designations). The OZ 2.0 designations will be effective on Jan. 1, 2027. Both the definition of a “low-income community” and the census data used to create new zones will differ from the Tax Cut and Jobs Act (TCJA). Therefore, it’s unlikely that current opportunity zones will keep their OZ status under the extender. Note that the OBBBA also repealed the provision that allowed states to designate contiguous tracts with a higher median income.
Under OZ 2.0, “low-income community” will not follow the definition under the New Market Tax Credit provision. In its place, generally, “low-income community” will mean that the median family income within a tract does not exceed 70% of the statewide median family income (or if the tract is located within a metropolitan area, median family income does not exceed 70% of the metropolitan area’s median family income).
OZ 1.0 designations will not expire until Dec. 31, 2028. Therefore, for the years 2027 and 2028, OZ 1.0 and OZ 2.0 designations will overlap.
Planning considerations: Taxpayers who wish to invest in an existing opportunity zone should be mindful of the changing zones. The grandfathering rules for initially designated opportunity zones are not entirely clear. Timing is critical, so it is important to consult with your tax advisor.
Taxpayers should also consider the utilization of state and federal incentive programs that work well with OZ 2.0. For instance, Baker Tilly recently published a webinar on combining EB-5 and Opportunity Zones.
The OZ 2.0 deferral and basis step-up provisions apply only to eligible gains invested after Dec. 31, 2026. Eligible gains invested after Dec. 31, 2026, are granted a five-year deferral and a 10% (or 30%, per below) basis step-up. Eligible gains invested on or before Dec. 31, 2026, are deferred only to Dec. 31, 2026, and receive no basis step-up.
Planning consideration: Taxpayers should consider structuring property sales in a manner that allows for eligible gain investments in 2027 or later. Some professionals are referring to 2026 as an OZ investment Dead Zone. Owners in pass-through entities can sell capital assets as early as Jan. 1, 2026, to take advantage of a 180-day investment window that begins as late as the un-extended due date of the pass-through entity’s tax return, i.e., March 15, 2027, for calendar year pass-through entities. Taxpayers may also consider whether installment sales may generate eligible gains in 2027 and after.
3. Previously deferred gains remain taxable on Dec. 31, 2026
The OBBBA does not change the taxability of gains deferred under the TCJA’s OZ program. In other words, previously deferred eligible gains will become taxable on Dec. 31, 2026. OZ investors should consider how these gains will impact their 2026 tax liability.
Planning consideration: Under the OZ program, the 2026 liability is the lesser of previously deferred gains or the fair market value (FMV) of the investor’s equity in the qualified opportunity fund. To the extent an OZ investment has been unsuccessful to date, investors should consider a valuation to support Qualified Opportunity Fund (QOF) equity that is worth less than previously deferred gains. Contact Baker Tilly's valuation professionals for strategic insight and unbiased business valuation. Investors may also consider the sale of capital assets that would generate a 2026 loss.
4. Heightened benefits for “rural” investments
A rural area is a city or town with less than 50,000 inhabitants. Rural areas receive two unique benefits:
(A) Investors in “qualified rural opportunity funds” receive a 30% basis step-up at year five; and (B) the “substantial improvement” standard for tangible assets is provided with a lower standard; specifically, a 50% basis increase.
Recently, the IRS released Notice 2025-50. It details guidance to address the substantial improvement provision under 1400Z-2(d)(2)(D)(ii), with respect to property in a rural area.1 The Treasury Department and IRS have determined there are 3,309 OZ 1.0 designations in rural areas and have listed those tracts within Notice 2025-50.
The Notice also states that tangible property located in an OZ 1.0 rural area that has been, or is in the process of being, substantially improved is eligible for the lower (i.e., 50%) substantial improvement standard. However, additional clarification is needed on how this seemingly retroactive provision would be implemented.
Planning consideration: OZ designations are a collaborative process between state governors and the Treasury Department. Consider contacting your local governor’s office to advocate for a specific rural
area.
5. Increased reporting requirements and new penalties
The TCJA promoted tax reporting simplification; therefore, OZ reporting was intentionally simple. The
OBBBA creates some new reporting requirements for QOFs and certain reporting obligations for qualified Opportunity Zone business (QOZBs), i.e., the operating entities owned by QOFs. QOZBs did not previously have any reporting obligations. The OBBBA also creates penalties, which can be as large as $50,000, for failure to comply with reporting obligations.
Some of the additional reporting requirements include North American Industry Classification System (NAICS) code, the approximate number of residential units for any real property held and the approximate average monthly number of full-time equivalent employees.
Planning consideration: Connect with a knowledgeable OZ professional. As reporting obligations grow more complex and enforcement becomes stricter, staying compliant is more critical than ever. Note that QOFs need to file income tax returns in the first year capital is received, even if there is no income statement activity. Partnerships are not generally required to file Form 1065 without income statement activity. However, QOFs must file to make the QOF election via Form 8996. Failure to make a timely QOF election will result in an expensive and time-consuming private letter ruling.
If you have questions on how the above information may impact you, please contact your Baker Tilly advisor.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.
