The OBBBA rekindles opportunity zones: What it means for real estate

How the One Big Beautiful Bill Act extends and expands the opportunity zone program

The OBBBA introduces several significant changes to the OZ program, aimed at expanding its reach and refining its impact. Below is a breakdown of the key enhancements and new provisions.

Basis step-up after 5 years

Taxpayers investing capital gains into a qualified opportunity fund (QOF) on or after Jan. 1, 2027, will be able to take a 10% basis step up for investments held at least five years. Gains deferred will now be recognized on the fifth anniversary of the investment date. 

Rural areas

The OBBBA created a new category of fund for rural areas. The qualified rural opportunity fund (QROF) provides for a 30% basis step-up for investments held at least five years. Gains deferred will also be recognized on the fifth anniversary of the investment date.

QROF is similar to a QOF, except the qualified opportunity zone business (QOZB) in which the QROF invests must be comprised entirely of a rural area. A “rural area” is any area other than a city or town with a population greater than 50,000 inhabitants and any urbanized area adjacent to a city or town with a population in excess of 50,000. 

Additionally, the OBBBA reduced the substantial improvement requirement for rural OZs from 100% to 50%.

Rolling 10-year QOZ designations

Every 10 years, state governors will propose new QOZs that will be certified by the secretary of the U.S. Department of the Treasury. The next designation will be on July 1, 2026. After the new zones are certified by the Treasury secretary, each census tract will remain a QOZ for 10 years beginning on Jan. 1 of the following year. 

Stricter eligibility criteria

The OBBBA narrows the eligibility criteria for OZs by lowering the threshold for designating a low-income community. Specifically, it decreases the percentage of area or statewide median income from 80% to 70%. Furthermore, the bill eliminates the ability to designate contiguous tracts of land as OZs.

Reporting requirements

New detailed reporting will be required along with additional penalty provisions. These provisions are designed to improve oversight and transparency regarding OZ investments. Failure to comply with the new reporting requirements could result in penalties of to $10,000 per return or up to $50,000 for QOF’s with over $10 million in assets.

Also, as part of the new rules, Congress now requires significant information to be submitted on informational returns that will be due annually.

Failure to file a complete and correct informational return will result in daily fines of $500 with maximum penalty not to exceed $10,000, $50,000 for a large QOF. If failure is due to intentional disregard, the fines will be higher. All fines will be adjusted for inflation.

Holding period limit

The OBBBA set a cap of 30 years for the holding of an investment. On the 30-year anniversary of an investment, the basis in the investment is stepped up to its fair value. Any increase in value after the 30-year investment period may be subject to tax.

What the OZ program changes mean for real estate companies and investors

The OBBBA reshapes the OZ program from a time-limited incentive into a long-term strategic tool for real estate development and investment. By making the OZ program permanent and introducing rolling 10-year designations, the legislation provides a more predictable framework for long-term planning and capital deployment.

For real estate developers, this means greater certainty and flexibility in pursuing multiphase projects that span years or even decades. The rolling 10-year designation cycle should create a steady pipeline of new zones, allowing firms to align their investment strategies with emerging markets.

The introduction of QROFs is particularly notable for how it may compel real estate developers to pursue projects in underserved rural markets with lower capital thresholds and higher tax advantages.

Investors also benefit from a more predictable tax landscape. The five-year recognition window for deferred gains and the 30-year holding cap provide clear timelines for tax planning. Additionally, the 30% basis step-up for rural investments creates a compelling incentive to explore underserved areas, potentially unlocking new opportunities in regions previously overlooked.

Meanwhile, the stricter eligibility criteria and enhanced reporting requirements signal a shift toward greater accountability around the OZ program. Real estate professionals must now balance opportunity with compliance, ensuring that their OZ strategies are both ambitious and defensible.

Steps that real estate companies and investors should take now

Real estate stakeholders should consider taking the following actions now to capitalize on the OZ program changes:

Evaluate existing OZ holdings: Review current QOF investments to determine whether they meet the new reporting and compliance standards, given the steep penalties for noncompliance.

Explore rural opportunities: Identify rural census tracts that meet the QROF criteria. The 30% basis step-up and reduced improvement requirements make these zones especially attractive for ground-up development and adaptive reuse projects.

Prepare for enhanced reporting: Establish internal systems to track and report OZ-related data. The new rules require detailed annual informational returns, and failure to comply can result in daily fines.

Engage with state officials: Begin conversations with state economic development offices to understand how new OZs will be proposed and certified. Early engagement may position firms to influence zone selection or prepare for future investment.

Long-term considerations for maximizing OZ benefits

The permanence of the OZ program under the OBBBA allows real estate firms to integrate OZ planning into their long-term investment strategies. To do so effectively:

Incorporate OZs into portfolio strategy: Treat OZs as a core component of location strategy, especially for mixed-use developments, affordable housing, and infrastructure projects. The rolling 10-year designation cycle enables ongoing pipeline development.

Leverage QROFs for sustainability and impact goals: Rural OZs offer a compelling opportunity to align tax strategy with sustainability objectives. Projects in these zones can deliver measurable community impact while unlocking superior tax benefits.

Incorporate OZs with other real estate tax planning: OZ benefits can also be complemented by other benefits and planning techniques such as cost segregation studies, low-income-housing tax credits, and new markets tax credits. 

Plan for exit at Year 30: The holding period cap requires investors to plan for disposition or recapitalization strategies well in advance. Consider structuring deals with built-in exit options or refinancing triggers to optimize timing and tax outcomes.

Monitor regulatory guidance: Treasury is expected to issue additional guidance on implementation. Staying informed will be critical to navigating compliance and capturing emerging opportunities.