The One Big Beautiful Bill Act (OBBBA) introduces sweeping reforms to the Qualified Opportunity Zones (QOZs) program, aiming to refine its scope, enhance its impact, and improve transparency. These changes, many of which take effect after December 31, 2026, reshape how investors, communities, and regulators engage with QOZs.
Rolling Ten-Year QOZ Designations
Beginning July 1, 2026, and recurring every ten years thereafter, state governors will propose new QOZs, which will then be certified by the Treasury Secretary. Each certified census tract will retain its QOZ status for a decade, starting January 1 of the following year. This rolling designation resets the acquisition window for QOZ Business Property, offering fresh opportunities for investment.
However, the OBBBA leaves some ambiguity. It’s unclear how the July 1, 2026 designation date aligns with the broader program changes effective after December 31, 2026. Additionally, the treatment of investments in existing opportunity zones that lose their QOZ status remains uncertain, with further regulatory guidance anticipated.
Revised Tax Incentives for Investors
Pre-2027 Investments: Investments made before January 1, 2027, will follow the current QOZ rules. Deferred gains will be recognized on December 31, 2026, and investors may still benefit from basis step-ups under the existing framework.
Post-2026 Investments: For investments made after 2026, gains will be recognized on the fifth anniversary of the investment date, rather than a fixed calendar date. A 10% basis step-up will apply just before the end of the five-year deferral period. Notably, the additional 5% step-up at the seven-year mark (that was part of the 2017 Opportunity Zone legislation) has been eliminated.
Long-Term Holding Benefits: Investors who hold their Qualified Opportunity Fund (QOF) investments for 10 to 30 years will continue to enjoy tax-free gains. If sold before 30 years, the basis in the QOF steps up to fair market value at the time of sale. If held for more than 30 years, the basis is frozen at the fair market value of the QOF interest as of the 30th anniversary.
Redefining Eligible Zones
Effective after December 31, 2026, the eligibility criteria for Qualified Opportunity Zones (QOZs) will become more stringent under the OBBBA. The income threshold for qualifying census tracts will be tightened, requiring that the median family income not exceed 70% of the area median, a reduction from the previous 80%. Additionally, a new anti-gentrification rule will disqualify tracts where the median family income exceeds 125% of the area median. OBBBA also repeals the contiguous tract rule, which previously allowed adjacent tracts to qualify based on proximity to eligible areas. Furthermore, the blanket designation that automatically granted QOZ status to all low-income communities in Puerto Rico will be removed. Further guidance is expected to clarify how tracts that lose eligibility mid-cycle will be treated.
Introduction of Qualified Rural Opportunity Funds (QROFs)
OBBBA introduces a new concept that is referred to as Qualified Rural Opportunity Funds (QROFs). The purpose of QROFs is to stimulate investment in rural areas by offering enhanced tax benefits. QROFs are required to invest at least 90% of their assets in QOZs located entirely in rural regions, which are defined as areas outside of cities or towns with populations exceeding 50,000, and their adjacent urbanized zones. Investors in QROFs will benefit from a 30% basis step-up after five years, a significant increase compared to the 10% available through regular QOFs. Additionally, the substantial improvement requirement is relaxed for QROFs—only more than 50% of the property’s adjusted basis must be reinvested, as opposed to over 100% for standard QOFs.
New Reporting Requirements and Penalties
OBBBA introduces comprehensive new reporting obligations and penalties for QOFs and Qualified Opportunity Zone Businesses (QOZBs), effective for taxable years beginning after December 31, 2025. QOFs will be required to report detailed information including total asset value, the value of QOZ property, NAICS codes, census tracts invested in, investment amounts per QOZB, property details such as whether assets are leased or owned, the number of residential units, and the count of full-time employees. They must also provide investor disposition data, which will be shared with both the IRS and the investors. Similarly, QOZBs must report comparable data to both the IRS and the QOF owners. Failure to comply with these requirements may result in penalties of up to $10,000 per return, or up to $50,000 for QOFs with over $10 million in assets, with even harsher penalties for willful violations. All penalty amounts will be adjusted for inflation.
If you would like to learn more about the new legislation and its impact on QOFs please feel to contact Louis Schatz at lschatz@goodwin.com or Elva Saltzman at esaltzman@goodwin.com.This blog will be updated when more information becomes available.