The budget reconciliation package PL 119-21, commonly referred to as the One Big Beautiful Bill Act (OBBBA) was signed into law by President Trump on July 4, 2025, and contains significant tax changes and spending cuts, including modification to the Qualified Opportunity Zone (QOZ) program under Internal Revenue Code (IRC) Sections 1400Z-1 and 1400Z-2.
This new law provides a revised framework for the QOZ program by creating a new round of designations, adjusting investment incentives with a focus on rural areas, and implementing strict reporting requirements.
These changes are important for real estate investors, developers, and fund managers to know because:
The clock is ticking. Existing QOZ benefits sunset after 2026. Anyone relying on those incentives needs to act now or adjust strategy.
New opportunities are ahead. A fresh round of zone designations means new places to invest with potentially better tax advantages — especially in rural areas.
The rules are stricter. The new law introduces detailed reporting and steep penalties for noncompliance, making it critical to stay on top of the paperwork.
The financial impact is real. Investors could trigger unexpected tax bills if they don’t plan properly for gain inclusion by the end of 2026.
The program is now permanent. The QOZ program isn’t just a temporary tool anymore — it’s becoming a long-term framework for community investment with evolving benefits.
This legislation reshapes how and where investors can deploy capital for tax-advantaged returns, and getting it wrong could mean missed opportunities — or hefty fines.
Qualified opportunity zones
QOZs are a community investment tool established by the Tax Cuts and Jobs Act of 2017 (TCJA) to encourage long-term investment in economically distressed areas.
The goal is to spur economic development and job creation in these communities by providing tax incentives to investors. Under TCJA, investors can defer and potentially reduce capital gains taxes by reinvesting gains.
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.
Since their creation in 2017 under the TCJA, QOZs have become a popular tool for real estate investors and developers seeking to reduce capital gains taxes while investing in the revitalization of underdeveloped communities.
Key provisions for QOZs under OBBBA
The main provisions impacting QOZs are as follows.
Modified opportunity zone program
The OBBBA introduces modifications to the QOZ program while retaining several of its core features and making the program permanent for tax years beginning after Dec. 31, 2026.
Original tax incentives — such as the deferral of capital gains through 2026 and the exclusion of post-investment appreciation after a 10-year holding period — will sunset as scheduled under existing law for investments made prior to Dec. 31, 2026.
While investments made prior to Dec. 31, 2026, will still qualify for the gain exclusion as provided by the current law, investors and fund managers will need to assess their strategies for investments made in the future.
Though it’s expected that benefits will continue to apply even if a zone loses designation under the new rolling 10-year designation, new designations may also open or shift investment opportunities. Investors should carefully analyze how and where to deploy capital in the future and consult with tax professionals.
New round of QOZ designations
A new round of QOZ designations is authorized, effective from Jan. 1, 2027, and will remain in effect for 10 years. Governors will designate these new zones by July 1, 2026.
The legislation focuses on developing low-income communities with specific criteria based on the population and median family income. The current designation as a QOZ remains in effect for the period beginning on the date of the designation and ending at the close of the tenth calendar year beginning on or after the date of designation, meaning Dec. 31, 2028.
Changes to tax incentives for investments
Changes to tax incentives for investments are as follows.
Tax deferral
Investments made in QOZs after Dec. 31, 2026, will be eligible for tax deferral until the earlier of the disposition of the investment or five years after the date of investment in the QOZ fund was made.
Investments held five-plus years
A 10% step-up in basis is available for investments held at least five years in QOZs — other than rural zones. In other words, the amount of deferred gain that’s ultimately taxed is reduced by 10% if the investment is held for five years.
Qualified rural opportunity funds
The tax benefits obtained by Qualified Rural Opportunity Funds (QROFs) are substantially enhanced relative to those available to regular qualified opportunity funds (QOFs) — specifically:
A rolling 30% basis-step up after five years — compared to a 10% basis step-up for regular QOFs. In other words, the amount of deferred gain that’s ultimately taxed is reduced by 30% if the investment is held for five years.
A reduced substantial improvement requirement — only 50% of adjusted basis must be reinvested in property improvements, compared to 100% of adjusted basis for regular QOFs.
10-year holding period
The ability to elect full exclusion of post-acquisition capital gains on investments held at least 10 years is maintained. The new law provides for a rolling 10-year period.
Under the new law, there’s also a freeze on capital gain exclusion for investments held for 30 years or longer. The basis step-up for investments held for 30 years or longer is limited to the fair market value of the investment on the 30-year anniversary of the investment.
New strict information reporting requirements
The bill includes new reporting requirements, including reporting of North American Industry Classification System (NAICS) codes and full-time employees to prevent program abuse.
Failure to comply with information reporting requirements related to QOF and QROF will result in a penalty of $500 for each day, not exceeding $10,000. For large QOFs, defined as $10 million in gross assets, a penalty shall be applied by substituting $50,000 for $10,000. See Section 6726 of the OBBBA for more information.
Next steps for businesses
The law’s modified provisions represent a notable change in tax policy. You should consult with your tax advisors to understand the implications of these changes, including:
Tax impact due to gain triggered in 2026
For investments made prior to Dec. 31, 2026, investors must recognize the remaining deferred gain on the earlier of an inclusion event or Dec. 31, 2026. The amount of deferred gain included in taxable income depends on:
The fair market value of your qualifying investment in the QOF on the date of the inclusion event
Adjustments to the tax basis of that qualifying investment
Investing
Analyze new opportunities for investment in QOZ business and QROFs.
Dead zone for investment
The provisions under OBBBA apply only to eligible gains invested after Dec. 31, 2026. Eligible gains invested on or before Dec. 31, 2026, are deferred only to Dec. 31, 2026, and receive no basis step-up.
Investors 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 opportunity zone investment dead zone.
