OBBBA: What’s New with Qualified Opportunity Zones

The One Big Beautiful Bill Act (OBBBA) of 2025 has made the federal qualified opportunity zone (QOZ) program permanent, one of the many soon-to-expire provisions created by the Tax and Jobs Act (TCJA) of 2017. The program was also updated with several new rules and reporting requirements.

Although most of the new QOZ rules don’t take effect until 2027, new reporting requirements and heightened scrutiny on noncompliance (bringing significant penalties) begin for tax years beginning after July 4, 2025. Read on to catch up on what’s new with QOZs.

What is a Qualified Opportunity Zone?

The federal QOZ program, created by the TCJA, lets taxpayers defer capital gains taxes owed from the sale of appreciated assets, such as real estate and investments, by reinvesting the funds in low-income communities. The major driving factor using a QOZ, though, is that all taxes on future appreciation achieved within the fund would be eliminated if held for a 10-year period after investment.

The tax benefits come from using capital gains to invest in a QOZ — a designated area in the United States containing a low-income community. Taxpayers must invest directly into a qualified opportunity zone fund (QOF) to achieve these benefits.  A QOF can be structured in one of two ways: It canso that it hold QOZ property directly, or it can own an interest in a qualified opportunity zone business (QOZB), which can make it easier to maintain qualification.

Plenty of rules apply. For example, the reinvestment of capital gains must be made within 180 days of selling the old asset that triggered the capital gain. Also, if the taxpayer is utilizing a QOZB structure, they are responsible for making “substantial improvements” to the QOZ property, generally requiring an investment of at least double the cost of the property (excluding land) over a 31-month period.

When executed properly, the QOZ program can play a powerful role in a real estate investor’s portfolio. When coupled with other tax provisions, such as federal and state rehabilitation credits and like-kind exchanges, the tax benefits can be significant. Working with a knowledgeable QOZ tax advisor can help taxpayers identify the most efficient way to pursue QOZ investments and ensure compliance.

How did the OBBBA change QOZs?

The OBBBA made several key changes to the QOZ program which take effect on January 1, 2027.Although most changes apply only to capital gains rolled into QOZ investments after 2026, enhanced reporting requirements (with noncompliance penalties of up to $50,000) will apply to all active QOZ investments starting with any tax year that begins after 7/4/2025.

TCJA QOZ rules (for investments made before January 1, 2027)	OBBBA QOZ rules (for investments made on or after January 1, 2027)
QOZ program available only for properties acquired before January 1, 2027	QOZ program made permanent
One-time designation of QOZs in 2018	QOZs redesignated every 10 years, beginning July 1, 2026
Capital gain deferral until the sooner of 1) selling the QOZ investment or 2) December 31, 2026	Capital gain deferral until the sooner of 1) selling the QOZ investment or 2) five years after acquisition
5% basis increase after holding for 5 years and 10% basis increase after holding for 7 years and before December 31, 2026	10% basis increase after holding for 5 years
N/A	30% basis increase after holding qualified rural opportunity investment for 5 years
After holding QOZ investment for 10 years, capital gains on qualified investments held in the fund are not taxable through December 31, 2047	After holding QOZ investment for 10 years, capital gains on qualified investments held in the fund are not taxable for first 30 years after acquisition
Special rules for Puerto Rico QOZs	No special rules for Puerto Rico QOZs

QOZ Program Has Been Made Permanent

The TCJA created the program for capital gains that are reinvested into QOZs from 2018 through 2027. The OBBBA made the program permanent.

Capital gains that are reinvested before December 31, 2026, generally remain subject to the TCJA rules. As explained later, capital gains that are reinvested in QOZ between now and December 31, 2026, will still have to pay those capital gains during calendar year 2027. On the other hand, capital gains realized in 2026 but reinvested into QOZ property in 2027 would be subject to the new rules under OBBBA and would be able to defer the tax for five more years.

For those contemplating QOZ investments during this in-between time, it’s crucial to reach out to a QOZ tax advisor to understand the implications.

QOZs Are Designated Every 10 Years with New Eligibility Requirements

Most existing QOZs were designated in 2018. Under the new rules, QOZs will be designated every 10 years. In addition, the rules for determining eligible low-income communities have gotten stricter, meaning there will likely be fewer available zones. The first designation under the new rules will start on July 1, 2026.

The OBBBA isn’t clear on whether QOZ investments continue to receive QOZ program tax benefits even if the low-income community loses its QOZ designation. The IRS is likely to issue guidance to clarify this and several other points about the updated program.

Timelines Have Changed for Basis Step-Ups

Under the TCJA rules, taxpayers receive an increase, or step-up, in their basis in QOZ investments after five years. The basis step-up is equal to 10% of the capital gains reinvested in the QOZ property. An additional 5% basis step-up applies after seven years. These holding period milestones must be reached by December 31, 2026.

Capital gain is the difference between an asset’s selling price and the taxpayer’s basis in the asset. A basis step-up helps taxpayers reduce that difference, effectively lowering their capital gains tax bill.

Here’s how the QOZ step-up works under the TCJA rules: Say that a taxpayer had a $150,000 capital gain in 2018. In 2019, the taxpayer invested all $150,000 in a QOF. By 2024, the taxpayer’s basis in the QOZ property was automatically stepped up by $15,000. By 2026, the basis will go up by another $7,500.

Under the OBBBA rules, the same 10% basis step-up applies after holding the QOZ investment for five years. However, the additional 5% step-up after seven years has been eliminated. Therefore, a taxpayer that re-invests $150,000 worth of capital gains in a QOZ will receive only the $15,000 basis step-up and not the $7,500 additional step-up.

The TCJA rules apply to capital gains that are reinvested by December 31, 2026, and the OBBBA rules apply to reinvestments made on or after January 1, 2027.

Capital Gains Tax Elimination on QOZ Appreciation

To encourage taxpayers to hold onto their QOZ properties long-term, the TCJA eliminates capital gains taxes owed on QOZ investments that are held for at least 10 years and sold before December 31, 2047.

The TCJA excludes gain during that period by automatically stepping up the taxpayer’s basis in the pre-2027 QOZ investment to its fair market value as of December 31, 2047, or the date of sale, if earlier. So even a QOZ investment sold after December 31, 2047, will still benefit from a significant reduction in capital gains taxes compared to a similar investment outside of a QOZ.

The OBBBA’s rules are similar. Taxpayers who hold their post-2026 QOZ investment for at least 10 years also benefit from no capital gains tax for a specified period. However, rather than the basis being stepped up to fair market value on December 31, 2047, it is stepped up to its fair market value on the 30th anniversary of holding the QOZ investment, or the date of sale, if earlier. The IRS is expected to release guidance on how taxpayers are to determine a QOZ investment’s fair market value on the 30th anniversary of acquiring it.

Qualified Rural Opportunity Fund Is Created with Special Benefits

The OBBBA created a new type of eligible fund — a qualified rural opportunity fund (QROF). These funds must invest at least 90% of their assets in low-income, rural communities.

Investing in a QROF comes with two special benefits:

• After holding a QROF investment for at least five years, taxpayers receive a basis step-up that is equal to 30%, rather than 10%, of the capital gains rolled into the investment.
• The “substantial improvement” requirement for QOZ properties in these rural communities calls for a 50%, rather than 100%, additional investment over a 31-month period.

While most QROF provisions take effect after December 31, 2026, the reduced substantial improvement threshold is effective as of July 4, 2025; although significant, the use of these new designations may still be a bit off in the future.

Reporting Requirements and Penalties Are Heightened

The OBBBA imposes more reporting requirements — and harsher penalties for noncompliance — that apply to all QOZ investments, regardless of their start date. These new requirements include additional reporting on the sale of QOZ investments and other rules that will come through regulations.  These reporting requirements apply for tax years beginning after July 4, 2025

Failure to file a complete and correct return results in penalties of $500 per day, up to $10,000 (up to $50,000 for QOFs with more than $10 million in gross assets). Penalties are even greater for taxpayers who intentionally disregard QOZ reporting requirements.

Put simply, noncompliance can be costly. It’s worth working with a proactive tax advisor who will stay abreast of these reporting requirements to help avoid costly penalties.

Smith + Howard: QOZ Tax Specialists

Smith + Howard’s QOZ team has been helping clients understand and benefit from the QOZ program since its inception. Always interested in proactive tax planning, advisors thrive in exploring how the changing QOZ rules will affect their clients.

With most provisions not beginning until 2027, there is time for taxpayers to weigh the pros and cons of QOZ investment under the new law. Contact Smith+ Howard Partner Chris Conrad at [email protected] to learn more about the QOZ program and whether it fits in with your overall real estate investment strategies.