Opportunity Zones: 2025 Year-end planning considerations

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 Note that the OBBBA also repealed the provision that allowed states to designate contiguous tracts with a higher median income.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.

2. “Dead Zone” for investment

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.