Earlier today, on 7-1-25, the Senate passed its version 2 of the Big Beautiful Bill by a vote of 51-50 with Vice President Vance casting the tie breaking vote. Senators voted along party lines with the exception of Republicans Rand Paul, Susan Collins and Thom Tillis who voted to oppose the Bill. The Bill addressed many tax topics but the focus of this post is on the OZ portion of the Bill. See attached for the actual text of the over 1,000 page Bill https://www.budget.senate.gov/imo/media/doc/the_one_big_beautiful_bill_act.pdf
Focusing on the Opportunity Zone sections of the Bill, there is a lot to digest (especially given how the Bill is presented without a redline to the original OZ Act but rather as line by line modification, making it a bit more difficult than need be to decipher).
Initially, of note, is the draft does NOT extend the original OZ Act, rather, it creates a perpetual framework for opportunity zones with the ability to add new zones every ten (10) years to take into account changes in demographics. This is very different from the House version that sought to create new zones that would be in effect from 1-1-27 through 12-31-33. Like the House version, the Senate version maintained that the zones that originally were created under the original OZ Act will continue to remain in place per the original OZ Act but additional OZ capital gain eligible investment (i.e., gain eligible investments) in these original zones would cease and not be permitted after on 12-31-26. Moreover, per the Bill and the original OZ Act, original investments in the OZ Act prior to 12-31-26 would NOT be extended and would become inclusion events as of 1-1-27 (meaning tax would be due on investors' original OZ investments).
Some key OZ takeaways in the new draft Bill:
- New Zones – There will be a new set of Opportunity Zones that would be selected by the governors of each state, the USVI, Guam and Puerto Rico, every ten years. Whether zones that had already been designated can be re-designated is not clear but it appears that so long as the definitions of what a zone is are met then re-designations could occur effective as of January 1, 2027.
- Rural Zones – Additional incentives for rural Opportunity Zones have been created, including a basis step-up of 30% (i.e., a reduction in the amount subject to tax), and a reduction in the substantial improvement requirement to 50% (from 100%).
- Deferral Benefit – the deferral benefit would be available to investments made in newly designated zones from and after 1-1-27 for new investments for a five year period from the investment into a QOF.
- 10% Reduction Benefit – the reduction benefit that had become no longer applicable under the original OZ Act would become relevant again for applicable investments in newly designated OZ projects made after 1-1-27 and held for a five year period.
- Ordinary Income Eligibility – as many readers will be aware, only capital gains eligible dollars were eligible for benefits under the original OZ Act. Under the Senate version of the Bill, unlike the House's version – no form of ordinary income are permitted to qualify for OZ treatment.
- Reporting – much of the bi-partisan reporting contained in various bills sitting in the House and Senate since 2022 have been included in the Senate (and House) version of the Bill, including required QOF annual reporting on various key performance indicators as well as Treasury reporting on the efficacy and progress of the OZ Program.
Follow the Yellow Brick Road – this perpetual program is separate from but builds upon the original OZ Act. Projects being developed under the original OZ Act will be subject to the original rules with deferral ending on 12-31-2026 (as drafted now). New zones would be created under the Bill and would likely be operational as of 1-1-2027 for a ten-year period and have this period for deferring capital gains if such gains are invested after 1-1-2027. Some view the Senate version as creating a "dead zone" which will drive investment into the post 1-1-2027 program. Personally, I don't see that as many 2025 and early 2026 gains will be under a 180 day investment requirement so will not be able to wait for a "better result" from the 2027 version of the OZ program. Moreover, while fund to fund investments have NOT made it into the Senate version of the Bill, my sense is that given that the IRS and Treasury were not opposed to them previously, this will end up being codified in the rules and regulations as being permissible. Today was indeed a big day for OZs and other programs contained in the Bill (and a bad day for others – e.g., renewable energy and Section 179D). Given the perpetual approach provided by the Senate, if it holds in the final approved reconciled Bill, the OZ provisions will provide much appreciated clarity to the marketplace regarding OZs and likely lead to additional significant OZ investments on top of the $90 Billion of equity already invested in OZ since 2018. Not the full package some had hoped for but a very BIG step in the right direction.
Duane Morris has an active Tax Credits and Opportunity Zone Team to help organizations and individuals plan, respond to, and invest in Opportunity Zones and low-income and rural areas throughout the USA, including the US Virgin Islands and Puerto Rico using tax credit equity and standard equity. We have closed over 408 OZ deals since their inception and are actively working on over 13 OZ projects for owner/developers, investors and business owners at the moment. We would be happy to discussion your proposed project or investment with you.
Contact your Duane Morris attorney for more information. Prior Alerts on the topic are available on the team's webpage.
If you have any questions about this post, please contact Brad A. Molotsky, Robert Montejo, Lee Potter, Anastasios Kastrinakis, Cristina Sanchez or the attorney in the firm with whom you are regularly in contact.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.
