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As I sit here at the cross roads of the end of 2025 and the beginning of 2026, I am filled with renewed optimism in the Opportunity Zone program and not only its promise of economic development in low income areas but of new jobs, key performance indicators of health and investment and of new and exciting businesses being launched in OZs around the US. Under OB3, as many of you already know, the OZ program has been made permanent under the Tax Code.
Treasury and HUD will review data every 10 years and share this data with the Governors of all 50 states via updated maps that then meet the OZ statute. The Governors will then select from the eligible areas, up to approximately 25% of the eligible areas to become actual OZs for the next 10 year cycle. This mapping process is going on now at Treasury and HUD and is anticipated to be delivered to the Governors in April or so of 2026. The Governors will have a few months to then select the actual areas (i.e., the 25% of eligible areas) from the maps. The finalized maps should be available around July, 2026.
So what should folks be doing now???
If you have eligible OZ 1.0 property you will likely recall that these properties (the ones designated in 2018 as OZs) remain open to eligible gain investments through the end of 2026 (i.e., December 31, 2026). If you have not started your projects in OZ 1.0 by 12-31-26 then your ability to raise OZ capital will be seriously impaired (i.e., non-existent) absent some luck on your part.
Why – because OZ 1.0 are ONLY able to take in new OZ eligible capital through 12-31-26 as noted above.
Why Lucky – because the only way these projects could take in new OZ eligible capital after 12-31-26 would be if they were designated as an OZ as part of OZ 2.0 which goes into effect on January 1, 2027.
As such, if you have OZ 1.0 property you should be reviewing available mapping sites to see indicatively whether your site will qualify in OZ 2.0. Mapping sites are available at the Economic Innovation Group's website https://eig.org/ozs-resources/ and at Novogradac's web site https://www.policymap.com/embed/widget/12163/DNAOEK4MOFUIAGJCCEX7MVRX9IRWBIKG –
they are both excellent sources and show you as of the moment what sites are likely to be eligible. Just remember, being eligible is a start but if the Governor of your state does not pick your site from the list of eligible sites then you are not an OZ 2.0 site. Yes you can still develop the OZ 1.0 site but you will be limited in attracting new OZ capital as noted above. You can still raise NON OZ capital (i.e., dollars that will not be entitled to OZ benefits on sale).
Separately, if you have OZ 1.0 property and you are looking to get your site reauthorized under OZ 2.0 if it is eligible, I would not be waiting around and hoping, rather, I would be meeting with the town mothers and fathers to make sure they are aligned with your vision of what you want to develop and see if they are willing to send the applicable Governor a letter of support in this regard. Moreover, as others will surely be raising their hands to show the Governor's office how worthy their sites are for OZ 2.0 qualification, I would also be looking to share with the Governor's office why your site is relevant and should be picked as an actual site (i.e., job creation, health impacts, neighborhood creation, ending food blight, etc.).
Separately, remember that under OB3 the definition of what is eligible got tougher, meaning tighter – under OZ 1.0 this was having a poverty rate of at least 20% in a particular area, under OZ 2.0 the poverty level was increased to at least 30% – making it more difficult to qualify. As such there will be less zones in each state that will qualify to be included in the eligible maps provided to the Governors.
If you are a developer, what should you be considering – many of my clients are looking at the maps mentioned above to see what might be eligible as they look for land sites to build on. Note, the maps are not set in stone as demographics continue to shift and even if on the actual map, you are still subject to the Governor's picking of actual sites as noted above – but...knowing the landscape and being able to find "good" sites is an art form but having a starting place is key before the field becomes crowded with new developers hearing about the OZ program for the first time later this year. They are also meeting with towns they want to focus on to see what the town's appetite for development is and whether they will support construction and development.
Owners of OZ 1.0 sites should also make sure their compliance files are in order (just in case) – meaning having their filed form 8996's in an orderly fashion; having their Working Capital plans in the file (not in blank but filled out and updated); and having good records of eligible investments and capital expenditures to show "substantial improvements" and, if one took into account various time extensions under COVID in 2020 when they were and how they impacted their improvement period.
Owners of OZ 1.0 sites should also be thinking about obtaining a written third party appraisal of their property if they are of the view that their property has deteriorated in value. Why – the OZ rules allow one to pay the deferred capital gains tax at the end of the deferral period (i.e., 12-31-26) on the LOWER of your actual investment AND the fair market value of the property on 12-31-26. Rather than guessing at what FMV is for your property having an appraisal in place that supports your position on this point will be important if the IRS ever challenges your and your accountant's conclusion. Again, many have NOT focused on the point that the tax that is due at the end of 2026 is based on the LOWER of actual investment and FMV.
- Follow the Yellow Brick Road – there is much to do as we enter 2026 friends. Suggest we not wait around to be dictated to on where the OZ 2.0 zones are if you are looking to develop a site – see if it is likely to be eligible, get local support letter and go see the Governor to advocate for your site before it is too late. Be proactive vs waiting for the final OZ zones to be set in stone for the next 10 years. Separate discussion outside the bounds of today's soap box should be focused on regarding bonus deprecation and how it can be used to appropriately reduce taxable income during the 10 year holding period and how OZ's that sell after 10 years of the holding period do NOT pay depreciation recapture. Happy to discuss off line.
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 403 OZ deals since their inception and are actively working on over 15 OZ projects for owner/developers, investors and business owners at the moment. We would be happy to discuss 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.
