Qualified Opportunity Zones

July 17, 2025

The One Big Beautiful Bill Act (OBBBA) introduces significant changes to the Qualified Opportunity Zone (QOZ) program, enhancing its structure and extending its duration. Key amendments include the permanent extension of the program, stricter eligibility criteria for QOZ designations, and the introduction of Qualified Rural Opportunity Funds with unique tax benefits. The Act also revises gain deferral rules and basis step-up provisions for investments, and imposes comprehensive reporting requirements and penalties for noncompliance. These changes aim to improve the effectiveness and accountability of the QOZ program, fostering economic development in designated areas.

	Old Law (TCJA)	New Law (OBBBA)
Designation and Duration	QOZ designation lasts for 10 years from the date of certification. Contiguous tracts could be designated if adjacent to a low-income community. All low-income tracts in Puerto Rico were automatically designated as QOZs.	QOZ designation remains for 10 years, starting January 1 following certification. Contiguous tract designation is eliminated. Automatic designation for Puerto Rico low-income tracts is repealed.
Eligibility Criteria	Low-income community defined for new markets tax credit purposes.	Definition narrowed: must have a poverty rate of at least 20% and median family income not exceeding 125% of the metropolitan/state median, or median family income not exceeding 70% of the metropolitan/state median.
Gain Deferral and Basis Step-Up	Deferred gain included in gross income upon sale/exchange or December 31, 2026. Basis increased by 10% after 5 years and an additional 5% after 7 years.	Deferred gain included in gross income upon sale/exchange or five years after the investment, whichever comes first. Basis increased by 10% (30% for rural funds) after 5 years.
Investments Held for 10 Years	Basis treated as fair market value if held for at least 10 years, eliminating gain on appreciation.	Similar provision, with investments sold within 30 years treated at fair market value on the sale date, and those held longer treated at fair market value 30 years after the investment.
Qualified Rural Opportunity Funds	No specific provisions for rural opportunity funds.	Establishes "qualified rural opportunity funds" with decreased improvement thresholds and increased basis step-up.
Reporting Requirements	No specific rules for information or data reporting.	Detailed annual reporting requirements for QOFs and businesses, with penalties for noncompliance.
Effective Dates	Various provisions had specific deadlines, such as no elections after December 31, 2026.	Amendments effective primarily on July 4, 2025, and December 31, 2026, with specific dates for different provisions.

Example showing how QOZ tax benefits play out for investments made in 2018, 2022, 2025, and 2027, assuming:

Initial capital gain: $1,000,000
Capital gains tax rate: 20%
Qualified Opportunity Fund (QOF) investment doubles in value (2x return)
QOF held for at least 10 years and less than 30 years

Investor	Year of Investment	Step-Up in Basis	Deferred Gain Recognized	Year Gain Recognized	Tax on Deferred Gain	QOF Appreciation	Tax on QOF Appreciation	Total Tax Savings
A (2018)	2018	15%	$850,000	2028	$170,000	$1,000,000	$0	$230,000
B (2022)	2022	0%	$1,000,000	2026	$200,000	$1,000,000	$0	$200,000
C (2025)	2025	0%	$1,000,000	2026	$200,000	$1,000,000	$0	$200,000
D (2027)	2027	10%	$900,000	2037	$180,000	$1,000,000	$0	$220,000

Key Takeaways:

Investor A (2018) received the maximum benefit due to both step-up in basis and full exclusion of QOF gains.
Investor D (2027) benefits from the new OBBBA rules; 5 year gain deferral, a 10% basis step-up when the deferred gain is recognized after 5 years, and full exclusion of QOF gains.
Investors B and C still benefit significantly from the 10-year appreciation exclusion, but miss out on basis step-ups.

Click here to return to Larson & Company's One Big Beautiful Bill Act summaries.

Posted by Rick Van Valkenburgh, CPA

Rick is a Tax Partner at Larson & Company. He specializes in tax planning and preparation for small businesses and fast-growing companies and is a life insurance tax specialist.

Qualified Opportunity Zones

Qualified Opportunity Zones

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