The opportunity zones tax incentive was enacted in 2017 as a part of the Tax Cuts and Jobs Act (the TCJA) to increase long-term investment in "qualified opportunity zones" (OZs), which are population census tracts in "low-income communities" and certain tracts contiguous with low-income communities nominated by state governors and certified by the U.S. Department of Treasury. Census tracts were designated in all 50 states and Puerto Rico—these designations were set to expire at the end of 2028.
As enacted, the opportunity zones tax incentive generally provided three tax benefits to investors who invested their otherwise taxable gains from the sale or exchange of a capital asset in a "qualified opportunity fund" (a QOF) in a timely manner: (i) temporary deferral of the recognition of taxable gain until the earlier of December 31, 2026, or the disposition by the investor of its investment; (ii) the permanent exclusion of 10% of taxable gains invested in the QOF if the investment is held for five years as of December 31, 2026, and an additional five percent if held for seven years as of December 31, 2026; and (iii) if the investment is held for ten years or more, any appreciation on the investment may be permanently excluded from U.S. federal income tax upon disposition. Investments were required to be made by December 31, 2026.
The One Big Beautiful Bill Act (the OBBBA) expands and modifies the opportunity zones program in as follows:
- The OZ program is extended indefinitely: The OBBBA creates permanent rolling decennial determination dates beginning on July 1, 2026, for nomination to be an OZ. If designated as an OZ, the tract will be an OZ for the 10 years beginning on the January 1 of the following year. The applicable start date for acquiring "qualified opportunity zone business property" is amended to match the rolling designation periods.
- New criteria for designation of an OZ: The number of OZs is limited and the criteria for designation as an OZ is stricter: a community must either (i) have a median family income below 70% of the state or metropolitan area median family income (as opposed to 80% under the TCJA), or (ii) have a poverty rate of at least 20% combined with a median family income below 125% of the state or metropolitan area median family income. Tracts contiguous with low-income communities may not be designated.
- Changes to deferral periods: For investments made after December 31, 2026, gain deferred is required to be recognized in the taxable year that includes the earlier of the year of disposition or five years after investment in the QOF.
- Changes to basis adjustments: If an investment in a QOF is held for five years, the taxpayer's basis is increased by 10% (30% for qualified rural opportunity funds) immediately prior to the end of the five-year period. If a QOF investment is held for at least 10 years (and sold prior to 30 years), the basis of the investment is increased to its fair market value on the date of the sale or exchange (i.e., permanent exclusion of the gain).
- Elimination of sunset: The OBBBA eliminates the sunset provision that terminated all benefits for QOFs after December 31, 2047, and replaces it with a 30-year period based on the date of the investment in the QOF. If an investment is held for longer than 30 years, its basis is stepped-up to its fair market value at the end of the 30-year period, and any subsequent gain is not excluded from income at the time of later disposition.
- Enhanced reporting requirements: The OBBBA includes significant new reporting requirements for both QOFs and "qualified opportunity zone businesses," and imposes penalties for failure to comply.
Two items that were left out of the final bill: a change to the definition of eligible gain to allow up to US$10,000 of ordinary gain to be deferred by investing in a QOF, and a change to the lower-tier investment requirements that would have permitted fund of fund investments.
For more information on the OBBBA, please click here.
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