The QOZ tax credits were enacted in 2017 and sunset on December 31, 2026. This credit allows taxpayers to defer until December 31, 2026, the taxation of gain that they reinvest in a QOZ. The amount of deferred gain that is taxable is reduced by 10% if the QOZ investment has been held for 5 years as December 31, 2026, and another 5% if it has been held for 7 years at that time. Any additional gain on the investment would not be taxable at all if it is held for 10 years.
The One Big Beautiful Bill Act (OBBBA) has permanently extended the QOZ tax credit with some changes. Here are a few highlights.
- As with the prior law, if a QOZ investment is held for 5 years, only 90% of the deferred gain is taxable. The new law eliminates the additional 5% reduction in taxable gain for investments held for 7 years.
- By contrast, for investments in Qualified Rural Opportunity Zones, if the investment is held for 5 years, the gain subject to tax is reduced to 70% (as opposed to 90% for non-rural investments).
- Gain accruing on investments (whether urban or rural) after the 5th anniversary that are held for more than 10 years will still be nontaxable. However, any gain accruing after the 30th anniversary of the investment will be taxable.
- As of January 1, 2027, for a census tract to qualify as a Qualified Opportunity Zone, it must have median income that is 70% or less of the Area Median Income (AMI) as opposed to 80% of AMI as under current law.
Bottom Line: The extension of the QOZ tax credits continues to be a great opportunity to defer gain on the sale of investments and now there are additional benefits available for rural investments.
"I fear one day I'll meet God, he'll sneeze and I won't know what to say."- Ronnie Shakes
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