The 2025 Tax Act cements tax benefits offered under the Qualified Opportunity Zone ("QOZ") program, which was created to incentivize investment in low-income and high-poverty areas, and adds specific tax benefits for rural QOZ investors under the program, potentially making rural investments more attractive.
Under the original QOZ regime, investors received a 10% step-up in basis on the 5th anniversary of their investment, and an additional 5% step-up in basis on the 7th anniversary, thereby reducing their capital gain on dispositions before December 31, 2026. Thus, to reap the full 15% step-up benefit, investors would have needed to invest in a QOZ on or before December 31, 2019. Additionally, investments held for at least ten years were free from federal income tax upon disposition.
Under the Act, investments made after December 31, 2026 will be subject to a rolling 5-year period, allowing deferral of recognition for up to five years from the date of investment. By contrast, investments made before such date will obtain more limited benefits. Accordingly, investors may opt to defer QOZ investments until 2027. The Act retains the 10-year rule for tax-free dispositions.
The Act now provides for re-designation of zones as QOZs every 10 years. It also creates Qualified Rural Opportunity Funds ("QROF"), which are vehicles designed specifically for QOZ investments in areas that have a population of less than 50,000 and are not adjacent to a city with a population greater than 50,000. The QROF provides an enhanced 30% step-up in basis on the 5th anniversary of investments made after December 31, 2026.
Changes to the QOZ program could attract further investment in high-poverty and low-income areas. However, given that full tax benefits are available only for QOZ investments made after December 31, 2026, taxpayers should carefully consider the optimal timing of any investments.
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