Expanded QOZ Program Offers Tax-Savings Opportunities

Congress created the Qualified Opportunity Zone (QOZ) program to incentivize investments in low-income communities through valuable tax breaks. The original program was scheduled to expire, but it has recently been renewed and expanded under the One Big Beautiful Bill Act (OBBBA). This opens the door for savvy taxpayers to defer, reduce or exclude unrealized capital gains. Here's what you need to know.

QOZs in a Nutshell

The QOZ program was created under the Tax Cuts and Jobs Act of 2017 (TCJA). It generally lets taxpayers defer eligible short- or long-term capital gains on investment sales or dispositions if they reinvest their gains in qualified opportunity funds (QOFs) within 180 days. QOFs must maintain at least 90% of their assets in QOZ property. This includes investments in:

• Qualified QOZ businesses (partnerships or corporations, which must meet certain requirements related to conducting business in a QOZ, among other rules), and
• New or substantially improved commercial buildings, equipment and multi-family properties located in a QOZ.

A QOF investor receives an equity interest in the fund and several tax benefits. For example, under the original TCJA program, capital gains taxes on the rollover gains are deferred until the earlier of:

• The sale or exchange of the QOF investment, or
• December 31, 2026.

After holding the QOF investment five years, the taxpayer receives a step-up in the investment's tax basis, equal to 10% of the original "rollover" gain — meaning only 90% of that gain is taxable. After holding it seven years, the step-up increases to 15%, leaving only 85% taxable. If a QOF investment is held for at least 10 years, gains attributable to appreciation of the QOF investment itself are fully excludable.

The U.S. Department of the Treasury has designated more than 8,700 QOZs in low-income communities around the country, based on poverty rates and median household income. The current round of TCJA designations was slated to expire on December 28, 2028.

Recent Changes

The OBBBA makes the program permanent, with rolling 10-year QOZs. The first round will be designated on July 1, 2026, and available for investment on January 1, 2027. However, the new law narrows the eligibility requirements for the OBBBA program. Specifically, it updates the definition of a "low-income community" and eliminates the ability for a tract that's contiguous to a low-income community, but not one itself, to be designated as a QOZ.

Other Changes Under the OBBBA Include:

Modified tax benefits. While taxpayers can still temporarily defer their rollover gains, the step-up perk has been amended. As before, taxpayers will receive the 10% step-up in basis on the fifth year of their investments — but the rollover gains will be recognized on the fifth anniversary of the investment. Moreover, the OBBBA repeals the TCJA's additional 5% step-up after seven years. However, taxpayers can continue to benefit from a permanent exclusion of gains attributable to appreciation of the QOF investment itself if the investment is held for at least 10 years, up to 30 years after investment.

Enhanced savings in rural communities. The OBBBA creates new qualified rural opportunity funds (QROF). These funds, which must invest at least 90% in rural QOZs, come with more generous tax benefits than the standard QOFs. Where investors in the latter receive a 10% step-up in basis on their rollover gain after five years, investors in the rural funds will receive a 30% step-up on their rollover gain after five years.

Heightened reporting requirements. Under the OBBBA, QOFs and QROFs must report detailed information about their holdings, such as:

• The fund's total asset value,
• The value of the fund's QOZ property, and
• The QOZ census tract(s) that the fund invests in.

In addition, if a QOF investor disposes of an interest, the fund must provide a statement to both the investor and the IRS. Failure to comply with the reporting requirements could result in penalties of up to $10,000 per required informational return, or up to $50,000 for funds with more than $10 million in gross assets. The new reporting rules apply to tax years beginning after July 4, 2025.

IRS Guidance

The IRS recently issued Notice 2025-50, which clarifies some aspects of the QROF program. These favorable changes took effect on July 4, 2025. First, it defines "rural area" as any area other than:

• A city or town with a population greater than 50,000, and
• Any urbanized area contiguous and adjacent to such a city or town.

Approximately 3,300 of the existing QOZs in the United States are entirely in rural areas, according to the IRS notice.

The guidance also addresses the threshold for satisfying the "substantial improvements" requirement for existing buildings in rural areas to qualify for the program. For standard QOZs, property is substantially improved if, during any 30-month period after the property is acquired, investments in the property exceed 100% of the property's adjusted basis at the start of the period. For rural areas, these investments must exceed only 50% of the initial adjusted basis.

Stay Tuned

Most of the enhanced QOZ provisions apply to investments in QOFs after December 31, 2026, giving the IRS plenty of time to issue additional guidance and taxpayers time to prepare accordingly. Contact your tax advisor to help make the most of this tax planning strategy.