The One Big Beautiful Bill Act (OBBBA), P.L. 119-21, enacted on July 4, 2025, extends and enhances tax incentives for investments in qualified opportunity zones (QOZ). The existing QOZ regime remains in place for investments that occur on or before December 31, 2026. The OBBBA’s new QOZ regime generally applies to investments on or after January 1, 2027.

The QOZ rules became law on December 22, 2017, as part of the Tax Cuts and Jobs Act, P.L. 115-97. The current QOZ regime provides the following incentives for investments made on or before December 31, 2026:

• Capital gain deferral. A taxpayer may elect to defer capital gain from the sale or exchange of property by investing such capital gain in a qualified opportunity fund (QOF) within 180 days (subject to certain special calculation periods for gain recognized through pass-through entities, like S corporations and partnerships). Such gain may be deferred through December 31, 2026, or the earlier sale of the QOF investment. Illustratively, if an investor sold stock for $500, which was originally bought for $200, and timely invested $300 in a QOF, the $300 capital gain would be deferred.
   
• Exclusion of 10% or 15% of deferred capital gain. If a taxpayer holds a QOF investment for at least five years, before December 31, 2026, 10% of the deferred gains may be excluded and, if a taxpayer holds for at least seven years before December 31, 2026, an additional 5% of the gain (15% in the aggregate) may be excluded. Given that December 31, 2026 is currently fewer than five years away, neither of these benefits is available for new investments under the existing QOZ regime between now and December 31, 2026.
   
• 10-year appreciation exclusion. If a taxpayer holds a QOF investment for at least 10 years, then the taxpayer may exclude all post-investment appreciation. Illustratively, if a taxpayer timely invested $300 of capital gains in a QOF on July 18, 2025 and held through July 19, 2035, when the QOF investment appreciated to $1,000, the taxpayer would recognize the $300 of deferred capital gains on December 31, 2026, but would be able to eliminate taxes on the entire $700 of post-investment appreciation.

Taxpayers can continue to make QOF investments under the existing regime, so long as they make their investments on or before December 31, 2026.

The OBBBA makes several key changes to the QOZ regime with respect to QOF investments that occur on or after January 1, 2027.

• Permanent incentive with new QOZs to be declared. The QOZ regime is now a permanent incentive, as opposed to one that expires for investments made after December 31, 2026. Under the OBBBA new QOZs may be designated every 10 years, with the next round to be designated in 2026 for investments beginning in 2027.
   
• Five-year capital gain deferral. Capital gains deferred through investment in a QOF must be recognized upon the earlier of (a) a taxpayer’s disposition of its QOF investment or (b) five years after a taxpayer’s investment in a QOF.
   
• Exclusion of a portion of the deferred capital gains. In general, if a taxpayer holds a QOF investment for at least five years, then 10% of the originally deferred gain may be excluded.
   
• Increased benefits for certain rural QOZs. Greater incentives apply to certain investments in rural QOZs. An investor in a QOF with at least 90% of its assets invested in rural areas (a “qualified rural opportunity fund”) may exclude 30% of the originally deferred gains after a five-year holding period (as opposed to the generally applicable 10% exclusion). Additionally, a QOF must make a “substantial improvement” to any existing property that it purchases in a QOZ, which generally requires investments sufficient to double the basis of that property. For a qualified rural opportunity fund, however, substantial improvement only requires increasing the basis of such property by 50% percent.
   
• 10-year appreciation exclusion limited after 30-years. As with the prior QOF regime, if a taxpayer holds a QOF investment for at least 10 years, then the taxpayer may exclude all post-investment appreciation. However, this appreciation exclusion is limited to 30 years for investments on or after January 1, 2027. Additional QOF investment appreciation following a 30-year holding period is subject to tax. Illustratively, if a QOF investment of $1,000 appreciated to $10,000 after 30 years and was sold for $15,000 after 40 years, only $9,000 of the gain ($10,000 - $1,000) would be excluded.
   
• More targeted definition of low-income communities. Only low-income communities may be designated as QOZs. Under the OBBBA, a census tract can be treated as a low-income community only if (a) its median family income does not exceed 70% of the state or metropolitan median (for rural and urban tracts, respectively) or (b) it has a poverty rate of at least 20% and its median family income does not exceed 125% of the applicable median. Under prior law, the applicable percentage was 80%. The reduction in state median income requirements from 80% to 70% may limit the number of census tracts eligible for QOZ designation.
   
• New reporting requirements. The OBBBA establishes a new information reporting regime with penalties for non-compliance. These provisions are designed to improve oversight and transparency regarding the economic impact of QOF investments. Subject to rules that will be detailed in future Treasury Regulations, QOFs will be required to report to the IRS on items including the total asset value, QOZ property value, the North American Industry Classification System (NAICS) codes for its businesses, the census tracts it invests in, the amount invested in each qualified opportunity zone business subsidiary, the value of its tangible and intangible property and whether it is leased or owned, the number of residential units it owns, and the approximate full time employees it employs. In addition, it will be required to provide reports to the IRS and investors regarding investors who dispose of their QOF investments. Failure to comply with the new reporting requirements may result in penalties of up to $10,000 per return, or up to $50,000 for QOFs with over $10 million in assets (harsher penalties apply to willful non-compliance). These amounts will be adjusted for inflation.

As noted above, most of the new provisions in the OBBBA apply to QOF investments that occur on or after January 1, 2027. Thus, the existing regime remains in effect through December 31, 2026. States may designate new QOZs for investments under the new regime beginning on July 1, 2026, which is six months before the new regime comes into effect. Thereafter, a new designation period will commence every 10 years, on July 1.

We expect that the full impact of the new OBBBA QOZ regime may not be felt for several months or more. In the interim, please feel free to contact us with any questions regarding how new provisions may affect your investment strategy.