Opportunity Zones 2.0: What is new 

The Opportunity Zones program, established through the Tax Cuts and Jobs Act, is now a permanent program thanks to the One Big Beautiful Bill Act (OBBBA). The updated Opportunity Zone framework, known as OZ 2.0, continues to encourage long-term private sector investments in low-income communities nationwide.

Investors in Qualified Opportunity Funds (QOFs) operating within the designated Opportunity Zones (OZs) can continue to take advantage of federal tax benefits in exchange for their contribution to economic growth and investment in newly designated distressed communities.

Any entity or individual required to report capital gains can receive Opportunity Zone benefits. This includes individuals, C corporations (including regulated investment companies and real estate investment trusts), partnerships, S corporations and trusts and estates.

For project sponsors, the program may also help accelerate capital formation, reduce capital cost, fill gaps in the capital stack and enhance other federal tax credit transactions. The program applies to varied asset classes, project types and operating ventures.

A new provision incentivizes investment in rural areas. Funds that hold 90% of their Qualified Opportunity Zone Property (QOZP) assets for substantially all of the QOF’s holding period in a rural area are designated as Qualified Opportunity Rural Funds (QORF) [1]. Investors in QORFs receive two additional benefits compared to a standard QOF investment. Investors that own an QOF investment for five years in a QORF will increase the basis in their deferred gain investment by 30% (compared to QOF investment that will increase the basis of the deferred gain by only 10%).

Under OZ 2.0, investments in QORFs require only a 50% increase of the basis to be deemed “substantially improved,” compared to QOFs that require a 100% increase of the basis to be deemed substantially improved.

How it works

The OZ program offers federal tax incentives for investing unrecognized capital gains in QOFs, which are investment vehicles created specifically for these purposes. The amount of benefit ultimately recognized depends on the holding period of the investment.

Deferral: Investors receive a temporary deferral of tax on capital gains reinvested into QOFs. The reinvestment must be made within 180 days of the sale that created the gain, or in certain situations, within 180 days of the end of the taxpayer’s tax year. Special rules apply to a taxpayer’s distributive share of gains reported on a Schedule K-1. Under OZ 2.0, the period of deferral ends upon the earlier date of the sale of the reinvestment in the QOF or five years from the date of the investment. There are also other events that may accelerate inclusion of the originally deferred gains and terminate the OZ benefits.

In order for an investment to be eligible for the five-year deferral, capital gains investments need to be made into a QOF after Dec. 31, 2026.

Reduction: The reduction benefit provides investors with a step-up in basis in the original investment, the amount of which is contingent on the length of time they maintain the investment in the qualifying fund. If the investment is held for five years, 10% of the original gain is eliminated. If the investment is held for five years in a QORF (rural area), 30% of the original gain is eliminated.

Exclusion: If the investment in the qualifying fund is held for at least 10 years, any appreciation on the investment can be permanently excluded from taxation at the election of the taxpayer. If the qualifying fund (not a C corporation) sells any of its assets, investors with a 10-year hold can generally exclude their share of any resulting gain on the asset sale, with the exception of gains associated with the sale of inventory.

Benefits of the Opportunity Zone*

Where are the opportunity zones?

To establish new qualifying zones, states, U.S. possessions and Washington D.C., nominated various low-income communities. The governor of each state could select 25% of the state’s qualifying areas for the program. The qualifying areas were designated by census tract data and had to meet a new definition of low-income community. Generally, the median family income within a tract cannot exceed 70% of the statewide median family income (or if the tract is located within a metropolitan area, median family income does not exceed 70% of the metropolitan area’s median family income).

What’s next?

By July 1, 2026, each state will create new OZs. The new zones will be effective on Jan. 1, 2027. Further, guidance is anticipated regarding the “grandfathering” of OZs under OZ 1.0 because those zones are set to expire Dec. 31, 2028.

How we can help

By leveraging our expertise in real estate development, transactions and specialty tax planning, Baker Tilly is uniquely positioned to help potential investors and project sponsors maximize the benefits afforded by the Opportunity Zones program. If you are looking to invest gains in or leverage the opportunity zones program for a business or project benefiting low-income communities, connect with us today.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.