The Tax Cuts and Jobs Act of 2017 (TCJA) introduced Qualified Opportunity Zones (QOZs) under IRC §§ 1400Z-1 and 1400Z-2 to incentivize long-term investments in designated low-income census tracts. The program offers significant tax benefits to investors who reinvest eligible capital gains into Qualified Opportunity Funds (QOFs). The QOZ program was set to sunset on Dec. 31, 2026.

The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, makes QOZ provisions permanent and introduces several key changes, including the inception of a new fund type specific to rural projects.

This article discusses the QOZ program under the TCJA and the program changes under the OBBBA.

QOZ Incentives & Requirements Under the TCJA

The TCJA provided three main incentives to encourage investment in QOZs:

1. Deferral of Capital Gains: Capital gains reinvested in a QOF within 180 days of realization could be deferred until the earlier of:

• • • The date the QOF investment is sold or exchanged, or
    • Dec. 31, 2026.

2. Partial Step-Up in Basis: If the QOF investment is held for at least five years, investors receive a 10% basis increase and an additional 5% for investments held seven years, provided those holding periods were concluded by certain dates.

3. Exclusion of Post-Investment Gains: If the QOF investment is held for 10-plus years, investors may elect to step up basis to fair market value (FMV) on disposition, eliminating capital gains on appreciation.

To take advantage of these incentives, a number of requirements must be met. The main QOZ requirement, among others outside the scope of this article, is that a QOF must hold at least 90% of its assets in “QOZ property,” which is defined to include domestic stock or partnership interests and business property.

• Stock or partnership interests qualify as QOZ property if:
  
  
  • • Acquired after Dec. 31, 2017;
    • Such entity was a QOZ business at the time of issuance or organization; and
    • During substantially all of the QOF’s holding period of such stock or interests, such entity qualified as a QOZ business.
      
      
• QOZ business property means tangible property used in a trade or business of the QOF if:
  
  
  • • Acquired by the QOF by purchase after Dec. 31, 2017;
    • The original use of such property in the QOZ commences with the QOF or the QOF substantially improves the property; and
    • During substantially all of the QOF’s holding period for such property, substantially all of its use was in a QOZ.

“Substantially improves” means during any 30-month period beginning after the date of acquisition, additions to basis of such property in the hands of the QOZ business exceed an amount equal to the adjusted basis of the property at the beginning of such 30-month period in the hands of the QOZ business.

“Substantially all” means 70% of tangible property must be QOZ business property.

“QOZ business” means a trade or business in which substantially all of the tangible property owned or leased is QOZ property.

OBBBA Enhancements (Effective Jan. 1, 2027)

1. New QOZ Designation Cycle and Designation Requirements
QOZs will be re-designated every 10 years, with the first new designations effective Jan. 1, 2027. New QOZs will be subject to stricter eligibility criteria to better target economically distressed areas. Under the OBBBA, “low-income communities” that are eligible for QOZ designation are limited to population census tracts with a median family income not exceeding 70% of the statewide median family income (or 70% of the metropolitan area median family income if located within a metropolitan area), or such tract has a poverty rate of at least 20% and a median family income that does not exceed 135% of the statewide median family income (or 125% of the metropolitan area median family income if located within a metropolitan area).

2. Modified Deferral and Step-Up Rules
For QOF investments made after Jan. 1, 2027, deferred gain is recognized on the earlier of:

• • • The sale or exchange of the QOF interest, or
    • Five years after the investment date.

A 10% basis step-up applies if held for five years, eliminating the previously existing “deadline” by which such holding period must be completed. The additional 5% step-up for seven-year holdings is eliminated.

3. 10-Year Gain Exclusion Retained
The FMV step-up election remains available for QOF investments held for 10-plus years. If the investment is not sold within 30 years, basis is automatically stepped up to FMV at that time.

Qualified Rural Opportunity Zones (QROZs)

The OBBBA introduces Qualified Rural Opportunity Zones (QROZs)—a subset of QOZs targeting rural areas (generally, towns with less than 50,000 residents and not adjacent to urbanized areas). QROZs provide enhanced QROZ benefits, including:

• A 30% basis step-up after five years (versus 10% for standard QOZs); and
• Substantial improvement threshold reduced from 100% to 50% of adjusted basis (excluding land), easing compliance for real estate projects.

New Reporting Requirements

The OBBBA imposes expanded reporting obligations on QOFs:

• QOFs must disclose detailed information on assets, property, business operations, and impact metrics.
• Penalties up to $50,000 apply for noncompliance.

The QOZ changes under the OBBBA go into effect on Jan. 1, 2027. As such, practitioners should work with their clients to ensure they are taking full advantage of the QOZ program and its new incentives, and that QOFs are abiding by the new reporting requirements.