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The OBBBA Breathes New Life Into Opportunity Zones

Introduction
On July 4, 2025, President Trump signed into law H.R. 1, commonly referred to as the One Big Beautiful Bill Act (the “OBBBA”), which, among other things, reinvigorated the federal Opportunity Zone (“OZ”) program. The OBBBA makes permanent the OZ incentive and introduces broad reforms to zone designation, eligibility, tax benefits, compliance, and reporting. These changes provide greater opportunity for investors, developers, fund sponsors, and communities seeking to leverage OZ incentives for economic development, with special focus on rural America.
This client alert provides an overview of the OBBBA’s Opportunity Zone provisions. We here at Shulman Rogers are ready to discuss your specific situation.

The Opportunity Zone Program: Before the OBBBA
The OZ program, as originally enacted under the 2017 Tax Cuts and Jobs Act (the “TCJA”), was conceived as a temporary, place-based tax incentive to encourage private investment in economically distressed communities. Under the TCJA framework, new investments in OZs would only be eligible for tax benefits if made by December 31, 2026, and any deferred capital gain would be recognized no later than that date. States were permitted to nominate up to 25 percent of their eligible low-income census tracts, with eligibility determined by either a poverty rate of at least 20 percent or, generally, a median family income not exceeding 80 percent of the area median.

Investors participating in the program could defer capital gains by investing in Qualified Opportunity Funds (“QOFs”) and, if the investment was held for five years, benefit from a 10 percent basis step-up, with an additional 5 percent step-up available after seven years, though these benefits were functionally time-barred due to the December 31, 2026, recognition date. Furthermore, appreciation on investments held in a QOF for at least ten years could be excluded from taxable income. Reporting requirements for QOFs were relatively limited, with minimal transparency and few penalties for noncompliance. Despite attracting over $100 billion in private capital and catalyzing significant development, the program was criticized for its lack of transparency, insufficient focus on the most distressed areas, and a tendency to result in underinvestment in rural communities.

The OZ “Dead Zone”
Because gains deferred under the existing Opportunity Zone program must be recognized on December 31, 2026, and, as discussed below, the reformed Opportunity Zone program takes effect on January 1, 2027, taxpayers who recognize gain in the interim are largely unable to reap significant benefits.

For an investment in a QOF to qualify for gain deferral, eligible gains must generally be invested within 180 days of realization. This means that if a taxpayer realizes capital gains before July 5, 2026, they are locked into the existing OZ rules – and could not defer recognition beyond December 31, 2026. At this point, then, the remaining meaningful benefit is the exclusion from taxable income of appreciation of investments held for more than 10 years.

Key Changes Under the OBBBA
The OBBBA introduces a several reforms to the Opportunity Zone program.

Revised Tax Incentives
Most notably, the program is now permanent, with revised tax incentive and deferral rules for new OZ investments. Specifically, for investments made after December 31, 2026, capital gains may be deferred for five years from the date of investment, replacing the prior system where gains were deferred until December 31, 2026. Said another way, where the TCJA permitted deferral of gain recognition for more than seven years (for investment made during or before the 2019 tax year) or as little as one year (for investments made in 2025), the OBBBA allows for five years of gain deferral for investments made on and after January 1, 2027.

This rolling five-year deferral period also means that all eligible taxpayers may receive the 10 percent basis step-up for investments held at least five years. The additional 5 percent step-up previously available after seven years has been eliminated.

Also retained is the provision for tax-free growth on investments held for at least ten years; however, for investments held longer than thirty years, the basis is frozen at the value on the thirtieth anniversary, effectively capping the period of tax-free appreciation. Investments made prior to January 1, 2027, will continue to follow the old rules, while those made after December 31, 2026, will be subject to the new rolling deferral and step-up regime.

New OZ Designation Process
The OBBBA also establishes a decennial redesignation process, whereby every ten years, state governors may nominate up to 25 percent of eligible census tracts for OZ status, subject to certification by the Treasury Department. The first round of new designations will begin on July 1, 2026, and will take effect on January 1, 2027. Each designated tract will retain its OZ status for a period of ten years, which is intended to facilitate long-term planning and the execution of multi-phase development projects.

Eligibility criteria for OZ designation have become more stringent. The threshold for median family income has been reduced from 80 percent to 70 percent of the area median, and an anti-gentrification cap now disqualifies tracts with median family income above 125 percent of the area median, even if they otherwise meet the poverty test. The previous rule allowing for the inclusion of contiguous tracts (those adjacent to qualifying low-income communities) has been repealed, and the blanket designation for all low-income tracts in Puerto Rico has also been eliminated. As a result of these changes, the number of OZs is expected to decrease by nearly 20 percent, with a sharper focus on the most economically distressed communities.

New Sub-Program for Rural QOFs
The OBBBA introduced a new sub-program within the broader OZ framework for Qualified Rural Opportunity Funds (“QROFs”). These funds, which must invest at least 90 percent of their assets in rural OZs, offer a 30 percent basis step-up after five years. The substantial improvement requirement for rural OZs has also been reduced from 100 percent to 50 percent of adjusted basis, thereby lowering the capital threshold for qualifying projects. For the purposes of the program, rural areas are defined as any area other than (i) a city or town with a population of more than 50,000 people and (ii) any “urbanized area” adjacent to such a city or town. The reduced improvement threshold for rural areas is effective immediately, while other QROF benefits will take effect beginning January 1, 2027.

Moreover, the IRS clarified in Notice 2025-50 that the reduced substantial improvement requirement for rural OZs applies to existing OZ investments. So, certain OZ investments can take advantage of this reduction for their existing projects.

New Reporting Requirements
The OBBBA also imposes a significantly expanded reporting and compliance regime. QOFs, QROFs, and Qualified Opportunity Zone Businesses (“QOZBs”) are now required to provide detailed annual reports, including information on asset values, property details, NAICS codes, census tracts, residential units, and employment data. Funds must also provide statements to investors who dispose of QOF interests, while QOZBs must provide written statements to their QOF investors. Noncompliance with these requirements can result in penalties of up to $10,000 per return, or $50,000 for large funds with over $10 million in assets, with even higher penalties for willful violations. These penalties are indexed for inflation. In addition, the Treasury Department will publish annual and periodic reports on OZ investment activity and community outcomes, increasing public transparency and oversight.

Key Takeaways
The OBBBA’s reforms to the Opportunity Zone program have several important implications for industry participants. The program’s new permanent status provides a stable foundation for long-term investment strategies, removing the uncertainty associated with the previous sunset date. The upcoming redesignation of OZs in 2027 will be more competitive and targeted, as the eligibility criteria have been tightened and the number of qualifying tracts is expected to decrease. Early engagement with state officials may be a useful tool for those seeking to ensure that particular tracts are nominated under the new rules.

A notable shift in the program is the enhanced focus on rural investment. The introduction of QROFs and the associated tax benefits, such as the 30 percent basis step-up and reduced improvement requirements, are likely to make rural OZs especially attractive for large-scale, capital-intensive projects, including those in data centers, advanced manufacturing, agriculture, and infrastructure. At the same time, the stricter eligibility criteria mean that only the most distressed tracts will qualify, and contiguous or higher-income tracts will no longer be eligible.

Fund sponsors and QOF managers are now required to update their compliance systems to accommodate the expanded reporting and investor disclosure requirements. The expanded compliance and reporting requirements will necessitate thoughtful internal systems and proactive data collection, together with coordination with applicable service providers, as significant financial penalties may be imposed for reporting failures.

Conclusion
The OBBBA makes fundamental changes to the Opportunity Zone program, establishing it as a permanent and more targeted mechanism for promoting economic development, with an emphasis on rural investment. Ongoing consultation with legal and tax advisors is recommended to fully understand the implications of these changes and to position organizations for success under the new Opportunity Zone framework.

More Information

The contents of this Alert are for informational purposes only and do not constitute legal advice. If you have any questions about this Alert, please contact Jordan M. Halle or the Shulman Rogers attorney with whom you regularly work.

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