Legal Insights
I recently wrote about Opportunity Zones (“QOZs”), how they work and how they can be utilized for preferential tax treatment on certain investments. I closed that piece by stating that the current administration was a big fan of QOZs and would likely encourage additional favorable treatment. With the passage of the One Big Beautiful Bill Act (“OBBBA”) on July 4, 2025, the administration has accomplished just that.
The biggest change that will impact real estate investors is that the QOZ program will no longer expire on December 31, 2026, and will instead remain open indefinitely. To reflect the potential changes that a lifetime designation may provide, QOZs will now be designated and certified every 10 years (the first such period beginning on January 1, 2027, and running through December 31, 2036).
Some additional highlights of the changes to QOZs are discussed below.
Change in Step-Up Basis and Holding Periods
As discussed in the prior article, before the OBBBA, investment in Qualified Opportunity Funds (“QOFs”) held for at least 5 years would receive a 10% step-up in basis with an additional 5% step-up if held for 7-10 years. Plus, investors who held their Investments in QOFs for more than 10 years could elect for the basis to be the fair market value on the date of sale/exchange, resulting in a tax-free gain.
Under the OBBBA, the 10% step-up after 5 years remains, but there is no additional step-up thereafter.
Further, while the fair market value concept for investments held for more than 10 years remains, the OBBBA freezes the tax-free gain on the fair market value on the 30th anniversary after the investment in the QOF. Any gain after the 30th anniversary would be subject to tax.
New Rural Designation
The OBBBA did add an entirely new designation of QOZs known as qualified rural opportunity funds (“QROF”). A QROF:
- is qualified opportunity zone business (“QOZB”) property in which substantially all of its use was in a QOZ comprised solely of rural area; or
- is a QOZ stock or partnership interest in a QOZB in which all of the tangible property owned or leased is QOZB property and substantially all the use of which is in a QOZ comprised solely of rural area.
The addition of QROFs will provide a major benefit to those investors as it relates to the step-up in basis. Specifically, instead of a 10% step-up in basis after 5 years, investors can now enjoy a 30% step-up in basis for investments in QROFs.
Of course, as with all things, the devil is in the details. The OBBBA gives the Secretary of the Treasury (in consultation with the Secretary of Agriculture) the sole power to determine whether a QOZ is “comprised entirely of a rural area”.
“Rural areas” as detailed in the OBBBA are defined in section 343(a)(13)(A) of the 2 Consolidated Farm and Rural Development Act. As currently defined, this means “any area other than a city or town with a population greater than 50,000 inhabitants and any urbanized area adjacent to a city or town with a population in excess of 50,000.”
Fewer Low-Income Communities
Prior to the OBBBA changes, states and territories were permitted to designate up to 25% of low-income census tracts as QOZs. To qualify as a “low-income community,” the community previously needed to meet the definition prescribed under Section 45D(e) of the Internal Revenue Code which defined low-income communities as any census tract in which the poverty rate for such tract is at least 20 percent, or
(i) In the case of a tract not located within a metropolitan area, the median family income for such tract does not exceed 80 percent of statewide median family income; or
(ii) in the case of a tract located within a metropolitan area, the median family income for such tract does not exceed 80 percent of the greater of statewide median family income or the metropolitan area median family income.
The OBBBA tightened these requirements, reducing the income designation in the definition above to 70% instead of 80%. The OBBBA also added some additional restrictions to exclude census tracts if:
- in the case of a tract not located within a metropolitan area, the median family income for such tract is at least 125 percent of statewide median family income; or
- in the case of a tract located within a metropolitan area, the median family income for such tract is at least 125 percent of the metropolitan area median family income.
Further, the OBBBA removed the previous potential for census tracts directly contiguous to low-income census tracts to become QOZs.
Summary
As with most legislation and as our firm discussed in a series of articles about the OBBBA previously, there are both positive and negative takeaways for investors to consider when evaluating whether to invest in QOZs.
The removal of the additional step-up after 7 years may result in shorter holding periods for certain investors. The freeze on fair market value after 30 years, which was previously uncapped, may discourage some investors but embolden others.
Further, while the addition of potential QROFs expands some potential areas of development, the changes to the definition of low-income communities will undoubtedly reduce the number of census tracts that will now qualify as QOZs. However, the rolling 10-year renewals for designation allows for changes in demographics and development to possibly qualify in the future.
There are many additional aspects of the OBBBA changes to QOZs that will affect investors, and the above is not intended to capture the full impact of the legislation. Increased reporting requirements, timing and analysis will be a part of all QOZ evaluations. Knowing now that the program will be permanent, prudent and prepared investors will benefit from understanding these changes and incorporating this analysis into their portfolio decisions moving forward.
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This Insight does not constitute written tax advice as described in 31 C.F.R. §10, et seq. and is not intended or written by us to be used and/or relied on as written tax advice for any purpose including, without limitation, the marketing of any transaction addressed herein. Any U.S. federal tax advice rendered by DarrowEverett LLP shall be conspicuously labeled as such, shall include a discussion of all relevant facts and circumstances, as well as of any representations, statements, findings, or agreements (including projections, financial forecasts, or appraisals) upon which we rely, applicable to transactions discussed therein in compliance with 31 C.F.R. §10.37, shall relate the applicable law and authorities to the facts, and shall set forth any applicable limits on the use of such advice.