- Significant and permanent changes to the tax benefits of Opportunity Zones have been enacted.
- A taxpayer may defer or reduce taxes on capital gains by investing the gains in a Qualified Opportunity Fund.
- New Qualified Rural Opportunity Funds provide even more benefits to taxpayers.
Background
With the passage of the One Big Beautiful Bill Act (OBBBA) in early July, significant and permanent changes were made to tax benefits in regards to Qualified Opportunity Zones (QOZs). Originally created under the Tax Cuts and Jobs Act (TCJA) of 2017, investment through a Qualified Opportunity Fund (QOF) in these specially designated low-income communities can defer and reduce capital gains.
Forvis Mazars Insight: Program enhancement, together with permanency of the QOZ rules, may incentivize real estate developers to incorporate QOZ projects into their long-term investment and development strategies.
QOZ Tax Benefits
Deferred Gain
Taxpayers who have realized a taxable capital gain, generally through the sale of an asset such as real property, a business, or other investments, may defer recognition of the gain by making an investment into a QOF. Taxpayers have 180 days from the date of sale to do so.1 Gains realized in pass-through entities (PTEs), such as partnerships and S corporations, have additional flexibility regarding the timing of their investment. Prior to the OBBBA, the deferred gain was required to be recognized on December 31, 2026, regardless of when the investment was made. Pursuant to the OBBBA, there is a new five-year rolling deferral of gains. The 180-day reinvestment period has been retained.
Investment Basis Adjustment
Prior to the OBBBA, if the funds remained invested in a QOF for five years, the taxpayer would receive a 10% basis step up in their QOF investment based on the amount of the original deferred gain. After seven years, an additional 5% basis step-up was received, resulting in a total 15% basis adjustment. Due to the mandatory deferred gain recognition date of December 31, 2026, taxpayers were required to make qualified investments prior to December 31, 2019 to receive the full 15% basis adjustment.
Pursuant to the OBBBA, for QOF investments made after December 31, 2026, the 10% basis step up benefit after five years still stands; however, there is no longer an additional 5% basis step up after seven years. In addition, the permanence of the QOZ rules along with the five-year rolling deferral of gains allows all QOF investors to receive the 10% basis adjustment provided they maintain the qualified investment for the full five years.
Forvis Mazars Insight: Given the additional benefits for investments made after December 31, 2026, taxpayers should carefully consider the timing of new QOF investments if they plan to defer gains realized in 2026.
10-Year Gain Exclusion
Prior to OBBBA, after 10 years, capital gains from appreciation on the original QOF investment would be permanently excluded from tax.2 Pursuant to OBBBA, the 10-year holding period for new capital gains exclusion remains, but if held for longer than 30 years, the basis step up is capped at the fair market value (FMV) determined on the 30-year anniversary of the investment.
Qualified Rural Opportunity Funds (QROFs)
The OBBBA also introduced Qualified Rural Opportunity Funds (QROFs).3 These rural funds have increased benefits, such as a 30% basis step-up after being held for five years, and a reduced 50% substantial improvement requirement.4 Generally, the QROF rules are effective January 1, 2027; however, the 50% substantial improvement requirement is effective on July 4, 2025.
How QOZs Are Designated
A state’s chief executive officer5 nominates tracts to be designated as a QOZ. The U.S. Department of the Treasury (Treasury) ultimately certifies and designates qualifying tracts. IRS Notices 2018-48 and 2019-42 provide a list of current QOZs. An interactive map is also made available by the U.S. Department of Housing and Urban Development (HUD).
The OBBBA permanently extended the tax benefits of QOZs which were to sunset after December 31, 2026. With permanency now in place, the law also devised a regular cadence for QOZ designations. Beginning on July 1, 2026, new QOZs will be designated followed by new designations every 10 years thereafter. The 10-year designation period begins on January 1 following the QOZ designation date.
Forvis Mazars Insight: While existing QOZs may retain their designation zones beyond December 31, 2026, taxpayers should consider deferring investment decisions until at least July 1, 2026 to help ensure any post January 1, 2027 investments are qualified.
How Forvis Mazars Can Help
Opportunity Zones can be a part of your tax reducing strategy if properly structured. Our professionals at Forvis Mazars are equipped to help you do so. Reach out to one of our team members to learn more.
- 1§1400Z-2(a)(1)(A).
- 2The original deferred capital gain would have been taxed at the earlier of the end of 2026 or when the asset was disposed.
- 3Rural area is defined as any area other than a city or town with a population greater than 50,000 or adjacent to such a city or town.
- 4Property acquired by a QOF is generally required to be new property or property that is substantially improved after purchase by the QOF. The IRS defines substantial improvement as doubling the property’s basis, excluding land, within a 30-month period. The OBBBA lowers the requirement to 50% for rural property.
- 5A state’s CEO is the governor or the mayor of Washington D.C.