Section 70421 of the One Big Beautiful Bill Act (OB3) made the Opportunity Zones (OZs) program under §§1400Z-1 and 1400Z-2 a permanent feature of the Internal Revenue Code, with new zone designations every 10 years and a substantially revised set of investor benefits, eligibility criteria, and reporting requirements. This advisory refers to the newly revised framework as “OZ 2.0.”
On April 6, 2026, the U.S. Department of the Treasury and the IRS issued Revenue Procedure 2026-14, prescribing the procedures by which state chief executives will nominate census tracts for designation as Qualified Opportunity Zones (QOZs) and identifying the eligible tracts. The nomination window for new QOZs opens on July 1, 2026 and remains open for 90 days (subject to a single 30-day extension at the request of the state CEO). Nominations submitted during this period will result in new QOZ designations effective for the 10-year period beginning January 1, 2027 and ending December 31, 2036.
The next several months are consequential for various stakeholders: Investors holding existing QOZ investments face a fixed gain-recognition date at the end of 2026; investors with new gains must weigh the timing of investment against the two distinct benefit regimes; fund sponsors and businesses need to prepare for statutorily required enhanced reporting; and communities, developers, and local institutions have a narrow window to present data-driven cases for which eligible tracts their governors or state chief executives should nominate.
What Changed in the OZ Program?
The OZ program, enacted in the Tax Cuts and Jobs Act of 2017 (TCJA), generally provided two distinct categories of benefits to taxpayers who reinvested capital gains in qualified opportunity funds (QOFs) that deploy capital into designated low-income census tracts:
- The reinvested gain is deferred and may be partially reduced through one or two basis step-ups based on the holding period.
- The post-investment appreciation in the QOF interest may be fully excluded if the investment is held for at least 10 years.
The original program was strictly time-limited. The new gain deferral ended December 31, 2026; the original OZ designations expire at the end of 2028; and the §1400Z-2(c) election to exclude post-investment appreciation (which survives designation expiration for existing investments) was available only for dispositions through 2047. The OB3 eliminated these fixed deadlines and restructured the program around rolling 10-year cycles, with state chief executives nominating new zones each decade for certification by the Treasury secretary. For post-2026 investments, the 2047 deadline is replaced by a rolling 30-year fair market value (FMV) basis adjustment.
The OB3 also created two distinct benefit regimes keyed to the date of investment. Investments made on or before December 31, 2026 remain governed by the original TCJA rules. Deferred gain is recognized on December 31, 2026 (or earlier if an inclusion event occurs, such as a sale or other disposition of the QOF investment), and the 10-year exclusion of post-investment appreciation continues to apply to qualifying investments.
Investments made after December 31, 2026 may receive the following new OZ 2.0 benefits, subject to satisfaction of the applicable statutory and regulatory requirements:
- Rolling five-year deferral. Under §1400Z-2(b), gain deferred under §1400Z-2(a) election is included in income on the fifth anniversary of the investment (absent an earlier inclusion event), rather than on a fixed statutory date.
- Basis step-up of 10%. Investments held for five years receive a 10% basis step-up, excluding 10% of the deferred gain. The OB3 eliminated the additional 5% step-up that previously applied at the seven-year mark.
- Step-up of 30% for rural investments. Investments in a new fund category, a qualified rural opportunity fund (QROF), receive a 30% basis step-up at five years. QROFs must hold at least 90% of their assets in qualified opportunity zone property (QOZP) located in QOZs comprised entirely of rural areas.
- Exclusion of 10 years, with a 30-year limitation. Qualifying investments held for at least 10 years continue to qualify for the §1400Z-2(c) exclusion of post-acquisition appreciation. For investments held longer than 30 years, the basis adjustment is limited to the FMV of the investment determined on the 30th anniversary of the investment date.
OZ 2.0 Narrows the Definition of Low-Income Community (LIC)
A census tract generally qualifies as an LIC only if (i) its median family income does not exceed 70% of the applicable statewide (non-metro) or metropolitan area median, or (ii) it has a poverty rate of at least 20% and its median family income does not exceed 125% of the applicable median. The OB3 also eliminated the prior rule allowing designation of certain contiguous non-LIC tracts and repealed Puerto Rico’s special automatic designation rule (now subject to the standard 25% nomination limit applicable to all jurisdictions).
Existing OZ 1.0 designations do not carry over to OZ 2.0. All original zones sunset on December 31, 2028, and each tract must independently satisfy the new criteria and be newly nominated for the 2027 to 2036 period. This creates an immediate mapping and site-selection issue, and stakeholders should not assume that a current QOZ or a tract previously viewed as eligible will qualify in the 2027 to 2036 cycle.
What to Know About the 2026 Designation Round
Beginning July 1, 2026, state chief executives have 90 days, subject to one 30-day extension, to nominate eligible tracts. The number of designations is capped at 25% of each state’s LICs, with special rules allowing up to 25 designations for states with fewer than 100 LICs. Revenue Procedure 2026-14 identifies 25,332 eligible LIC population census tracts nationwide, of which 8,334 are comprised entirely of rural areas.
Because OZ 2.0 applies the 25% nomination cap to a smaller set of eligible LIC tracts, expect increased competition for designations. Stakeholders with development projects, land holdings, or community priorities in eligible tracts should begin engaging with governors’ offices now.
What Is the New Emphasis on Rural Investment?
The OB3 includes several provisions designed to further incentivize investment in rural areas, defined as any area other than (i) a city or town with a population of greater than 50,000 inhabitants, and (ii) any urbanized area contiguous and adjacent to such a city or town.
In addition to the 30% QROF basis step-up, the substantial improvement threshold for existing buildings in rural QOZs was reduced from 100% to 50% of basis. This change took effect on the enactment date (July 4, 2025), and Treasury and the IRS provided initial guidance in Notice 2025-50. This Notice addresses currently designated QOZs comprised entirely of rural areas, and future guidance is expected to address applications in the 2027 designation round. Rural projects that previously were not economically viable due to the substantial improvement requirement may warrant a fresh look, while the enhanced step-up materially improves the after-tax return profile of rural deals compared to non-rural deals.
What Are the New Reporting Requirements & Penalties Under OZ 2.0?
The OB3 imposed substantially enhanced annual information reporting on QOFs and qualified opportunity zone businesses (QOZBs) under new §§6039K and 6039L, effective for taxable years beginning after December 31, 2026. These requirements are backed by meaningful penalties under the new §6726 that scale with fund size. Treasury is also required to publish recurring public reports on program outcomes and community impacts.
Funds and portfolio businesses should not treat this as a routine extension of existing Form 8996 compliance. The new regime will require detailed fund-level and business-level information that many structures do not currently collect in a consistent, auditable format. Sponsors should begin assessing data ownership, whether governing documents and investor reporting processes need updates, how QOZBs will deliver required information to QOFs, and whether existing accounting systems can support annual reporting without significant manual effort. We are monitoring publicly released Treasury and IRS guidance, including any draft updates to Forms 8996 and 8997, and can help clients evaluate implementation considerations as guidance becomes available.
Why Does Timing Matter in 2026?
Existing Investors: Taxpayers with pre-2027 QOZ investments must recognize any remaining deferred gain on December 31, 2026 (or earlier upon an inclusion event). Investors should model their anticipated tax liability, confirm any remaining deferred gain after prior basis increases, and plan for estimated tax payments and liquidity needs. The 10-year exclusion of post-investment appreciation remains available for qualifying investments held at least 10 years, provided the disposition occurs by December 31, 2047.
New Investors: Gains reinvested on or before December 31, 2026 qualify for at most a short deferral period but may benefit from utilization of the existing QOZ map. Post-2026 investments must be made in newly designated zones to access OZ 2.0 benefits. For gains recognized late in 2026, the 180-day reinvestment window may offer useful transition planning flexibility.
Projects & Funds: Sponsors and investors should maintain detailed records supporting gain deferral, basis adjustments, holding periods, inclusion-event analysis, and 10-year exclusion eligibility. For new projects, sponsors should integrate the upcoming designation process with site selection, acquisition timing, financing, zoning approvals, incentive stacking, and reporting readiness.
What Can Stakeholders Do Now?
Investors & Family Offices: Existing investors should model the December 31, 2026 recognition event, confirm any remaining deferred gain after prior basis increases, and plan for estimated tax payments and liquidity needs. New investors should evaluate investment timing, the trade-offs between the current and OZ 2.0 regimes, and whether rural QOF or QROF strategies align with their overall tax and investment objectives. We can assist with gain modeling, transition planning, investment-timing analysis, and related tax planning.
Fund Sponsors & Asset Managers: Sponsors should evaluate whether current fund documents, compliance processes, investor reporting systems, asset-testing procedures, and QOZB information rights will support OZ 2.0 requirements. Sponsors contemplating post-2026 offerings should assess QROF qualification, rural strategies, and the potential benefits of separate vehicles. We can assist with fund structuring, QOF/QROF qualification analysis, compliance calendars, investor disclosures, and reporting-readiness reviews.
Businesses & Developers: Businesses and developers should compare potential project locations against the list of eligible tracts in Revenue Procedure 2026-14, monitor final designations, and reassess rural projects under the revised substantial-improvement rules. We can assist with tract eligibility reviews, project structuring, substantial-improvement analysis, QOZB compliance, and coordination of fund, business, and real estate documentation.
State & Local Governments, Communities, & Anchor Institutions: The nomination window opening July 1, 2026 represents the primary opportunity to shape the OZ map for the next decade. Hospitals, universities, foundations, local governments, and other anchor institutions should identify eligible tracts that align with their investment pipelines, infrastructure plans, housing needs, workforce development strategies, and community priorities. We can assist with eligible-tract analysis, designation strategy, stakeholder coordination, and development of data-driven materials to support internal planning and community-priority discussions.
Where Does the Current Guidance Stand?
Revenue Procedure 2026-14 currently governs the designation process, with additional guidance expected on OZ 2.0 mechanics, QROF qualification, expiring-zone transition issues, and enhanced reporting requirements. In the meantime, the statutory framework is in effect, the revised rural substantial-improvement rules are operative, and the December 31, 2026 recognition date for existing deferrals remains fixed.
How Forvis Mazars Can Help
OZs are becoming a recurring component of tax, real estate, fund, and community-development planning. If you have questions about investments, rural strategies, fund structuring, reporting readiness, or evaluating the 2026 designation process based on publicly available guidance, please reach out to a professional at Forvis Mazars. Our skilled, cross-functional tax teams are committed to delivering an Unmatched Client Experience® and helping you prepare for what’s next.
Note: This article is based solely on publicly available statutory, regulatory, and administrative guidance. The analysis and conclusions presented are general in nature and should not be treated as investment, legal, tax, accounting, or other professional advice regarding any specific organization, individual, transaction, or factual situation. The reader should perform their own analysis and form their own conclusions regarding any specific situation. Further, the author(s) conclusions may be revised without notice with or without changes in industry information and legal authorities.