[This is part of a Special Series on the tax changes made by the One Big Beautiful Bill Act, which was enacted in July 2025. It includes a wide range of changes to individual and corporate taxes, deductions, credits, forms and other topics, that affect tax filing starting this year into the future.]
For some taxpayers willing to invest funds in properties in low-income communities, “opportunity knocks” in the new One Big Beautiful Bill Act (OBBBA). Following up on provisions included in the Tax Cuts and Jobs Act (TCJA), the OBBBA generally enhances the tax benefits available for investments in the Qualified Opportunity Zone (QOZ) program and makes these favorable tax law changes permanent.
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Background: The QOZ program, launched by the TCJA in 2018, generally permits taxpayers to defer tax on certain recognized gains if those amounts are reinvested in a Qualified Opportunity Fund (QOF) within 180 days, using designated census tracts. In addition, a portion of such gains—the appreciation in value of the QOF investment—may be completely exempt from tax if the investment is held at least ten years.
The OBBBA ups the ante for investors on a permanent basis. This includes the following provisions.
- The OBBBA provides the structure for rolling QOZ designations. In other words, the census tract properties will be reviewed every ten ears to determine if they still merit QOZ designation. State governors will be able to redesignate OZs in their state based on the updated census tract information. Furthermore, the requirements for QOZ eligibility will be tightened.
- Currently, if a taxpayer holds an investment in a QOF for at least five years, the taxpayer receives a basis step-up equal to 10% of their tax-deferred gain. The OBBBA provides an additional 5% step-up in basis if the investment is held for at least seven years. For investments in QOFs after 2026, the investor may retain a permanent exclusion of 10% of deferred gain, but then forfeits the additional 5% step-up in basis.
- The new “income recognition” date for investments made in QOFs after 2026, is the earlier of (1) the date the investment is sold or exchanged or (2) the date that is five years after the investment in the QOF. However, investments made through the end of 2026 will have an income recognition date of December 31, 2026.
- If a taxpayer holds an investment in a QOF for at least ten years, the taxpayer currently receives a basis step-up to fair market value (FMV) on the date the investment is sold or exchanged. New law update: For taxpayers who hold their QOF investments for more than 30 years, their basis step-up is lifted to the FMV of their investment on that 30-year anniversary date.
- Finally, if a QOF invests in tangible property used in a “rural OZ,” the 10% exclusion attributable to a five-year holding period is increased to 30%. Other special rules may apply to rural OZs.
Note that the new law also coordinates the tax breaks for investors in QOFs with tax credits for low-income housing credits. These rules are extremely complex and will require most clients to seek professional assistance.
Caution: This type of investment is not for everyone, especially since it requires a significant holding period to collect the tax rewards. Discuss the options with investors who have shown an inclination to pursue these types of opportunities.
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