Key Changes to The Opportunity Zone Program in The One Big Beautiful Bill Act

The Tax Cuts and Jobs Act of 2017 designates certain low-income community population census tracts as qualified opportunity zones and creates tax incentives for those with capital gains looking to roll over their investments on a tax-deferred basis. Under the program, taxpayers who reinvest their capital gains in qualified opportunity zones can (i) defer recognition of such capital gains until December 31, 2026, (ii) recognize up to a 15% step up in basis in such deferred capital gains after 7 years, and (iii) eliminate all gains in excess of the deferred capital gains amount if the investment is held for 10 years or more.

The Basics of the Opportunity Zone Program

Similar to a 1031 exchange, a taxpayer with capital gains has 180 days to reinvest those gains into a "qualified opportunity fund", which is a corporation or partnership organized for the purpose of investing in "qualified opportunity zone property". Qualified opportunity zone property includes any qualified opportunity zone stock, any qualified opportunity zone partnership interest, and any qualified opportunity zone business property. 

Qualified opportunity zone business property means tangible property used in a trade or business of a qualified opportunity zone fund if such property (1) was acquired by purchase after December 31, 2017, (2) the original use of such property in the opportunity zone commences with the fund or the fund substantially improves the property, and (3) substantially all of the use of such property was in an opportunity zone during substantially all of the fund's holding period for the property. Such property will be treated as substantially improved by a fund only if, during the 30-month period beginning after the date of acquisition, the additions to the basis of such property in the hands of the fund exceed the adjusted basis of such property at the beginning of the 30-month period. In other words, the taxpayer must basically double its investment in the property after purchase.

A qualified opportunity zone business is a trade of business in which substantially all of the tangible property it owns and leases qualifies as opportunity zone business property. In addition, at least 50% of the total gross income of the business must be derived from the active conduct of such business, and the average of the aggregate unadjusted bases of the qualified opportunity zone business property attributable to "nonqualified financial property" must be less than 5 percent. Certain businesses are excluded from the program, including private or commercial golf courses, country clubs, massage parlors, hot tub or suntan facilities, racetracks or other gambling establishments, and any store whose primary business is the sale of alcoholic beverages for off-premises consumption.

Extension of the Tax Benefits Under the Act

With the tax benefits of opportunity zones set to expire on December 31, 2026, President Trump signed into law the One Big Beautiful Bill Act (the "Act"), which includes significant changes to the program, including the permanent extension of the program. Prior to the Act, capital gains invested in opportunity zones required recognition on December 31, 2026. The Act extended the deadline by providing for a rolling 5-year deferral of capital gains for investments made after December 31, 2026. This means the deferral period is now rolling and not tied to a specific date. Investments made at any time after December 31, 2026, can now be deferred for 5 years, or until the investment is sold if sold at an earlier date. 

Further, the taxpayer may step up its basis in the deferred gain by 10% after 5 years, thereby eliminating 10% of the deferred capital gain. The additional 5% step-up in basis of the deferred gain was eliminated by the Act, so the total basis step-up in deferred capital gains was reduced from 15 to 10% by the Act. The Act preserves the taxpayer's election to step up its basis and eliminate gains in excess of the deferred capital gains after 10 years, however the step up in basis is frozen at the fair market value of the investment at the 30-year mark, preventing the indefinite exclusion of gains. 

Creation of the Qualified Rural Opportunity Fund

The Act also creates a new category of opportunity zone fund called the Qualified Rural Opportunity Fund ("QROF"). A QROF is an opportunity fund that holds at least 90% of its assets in qualified opportunity zone property located entirely within rural-designated qualified opportunity zones. A "rural area" is any area other than a city or town with a population greater than 50,000, and excludes urbanized areas contiguous and adjacent to such a city or town.

Investments in QROFs receive greater tax benefits than regular opportunity zone investments, as the step-up in basis after 5 years is increased from 10% to 30%. In addition, the "substantial improvement" requirement for existing property in rural qualified opportunity zones is only 50% of the property's original adjusted basis. This means an investor does not have to "double" its investment in the property, but instead only invest an amount that is 50% of the initial investment. Notably, while the other changes to the Act described herein do not take effect until after December 31, 2026, the reduced substantial improvement threshold took effect immediately upon the signing of the Act on July 4, 2025.

New Reporting Requirements 

Prior to the Act, a qualified opportunity zone fund's reporting requirement was mainly limited to the annual filing of a Form 8996. The Act expands these requirements significantly, calling for more detailed annual reports that include the name and address of the qualified opportunity zone fund business, its NAICS classification, information regarding any residential units held, asset values, and employment data. Failure to comply with the new reporting requirements can result in penalties of up to $10,000 per return for smaller funds, or up to $50,000 for larger funds, as well as additional penalties apply for willful noncompliance. 

Moving Forward

The Act makes the opportunity zone program permanent. Beginning January 1, 2027, taxpayers can invest deferred gains in opportunity zone funds without fear of a set expiration date. Adams & Reese will closely monitor for any further updates to the program, including the issuance of any new Treasury Regulations.