By Aaron Mayer, Director of Sherbert Consulting and Moxie Investment Funds, amayer@sherbertconsulting.com
Introduced in the 2017 Tax Cuts and Jobs Act (TCJA) to drive community revitalization in low-income communities, the federal Opportunity Zone (OZ) program was made permanent through the One Big Beautiful Bill Act (OBBBA), signed on July 4, 2025, after years of Congressional efforts to extend it.
Existing Investments
Existing OZ investments and new investments made through 2026 remain subject to the 2017 TCJA rules. The exception to this is with new compliance obligations, described below.
New Opportunity Zones
Starting July 2026, state governors may nominate 25% of low-income census tracts as Opportunity Zones. However, the data for some previously eligible tracts may have changed, as it is likely that the newer 2019-2023 ACS 5-Year Estimates will be used to determine eligibility. Additionally, the criteria for a tract to qualify are more stringent than under the old program rules.
New designations take effect January 1, 2027. But the current zones do not expire until the end of 2028, so there will be a two-year overlap for tracts.
OZs will have “Decennial Designations,” so further into the future, new tracts will be designated every ten years.
Investments After 2026
Any investment made into a Qualified Opportunity Fund (QOF) on January 1, 2027 or later will be subject to the new rules. Components to be aware of include:
- Gains may be deferred under this program for up to five years after the qualified investment in the QOF.
- If the qualified investment is held for at least five years, the deferred gain may be reduced by 10%.
- A qualified investment held for at least ten years would still have its basis stepped up to fair market value (FMV) at time of sale. But any investment sold after a 30-year hold would have its basis stepped up to FMV at the 30-year mark.
- There are more favorable provisions for funding a qualified rural QOF. For example, the threshold for substantial improvement for structures in rural areas would be 50% rather than 100%.
Reporting Requirements
For tax years beginning after July 4, 2025, QOFs and OZ businesses will have some additional reporting requirements, including NAICS codes, residential units, FTE employees, etc. Noncompliance may incur fairly significant penalties.
Transition
Investors face complex timing considerations with the OZ program, especially over the next year. The current timing provisions (e.g. when to trigger the capital gain for deferral, which 180-day period to use for funding, etc.) are compounded by the switch from the old rules to the new rules, as well as the two-year overlap in OZs. The Sherbert Group, with eight years of OZ expertise, can guide you in navigating these changes as you structure your real estate investment. Contact us to optimize your strategy.