Article

Five key takeaways on the Opportunity Zones extender in the One Big Beautiful Bill Act 

Jul 17, 2025 · Authored by Colin J. Walsh

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 the changes won’t impact taxpayers in the near future. However, the following should be considered in the coming months:

1. New zones – effective Jan. 1, 2027

By July 1, 2026, each state will create new OZs. The new zones 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 OZs 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 Note that the OBBBA also repealed the provision that allowed states to designate contiguous tracts with a higher median income.

Planning consideration: Clients who wish to invest in an existing OZ should be mindful of the changing zones. The grandfathering rules for initially designated OZs are not entirely clear. Timing is critical so consult with your tax advisor.

2. “Dead Zone” for investment

The extender 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: Clients should consider structuring property sales in a manner that allows for eligible gain investments in 2027 or later. Some professionals are referring to the next 18 months 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. Clients can 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 (QOF). To the extent an OZ investment has been unsuccessful to date, investors should consider a valuation to support QOF equity that is worth less than previously deferred gains. Baker Tilly’s valuation team can assist. 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.

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.

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.

Tax disclosure: 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.