Overview
The One Big Beautiful Bill Act (OBBBA) significantly modified the Qualified Opportunity Zone (QOZ) program via a set of comprehensive reforms aimed at improving accountability, long-term impact, and geographic equity. The new rules will take effect after the expiration of the current program on December 31, 2026. The changes fall into three main categories. First, the legislation introduces a decennial re-designation process, requiring the geographic designations of all opportunity zones to be reevaluated every 10 years to ensure they continue to serve economically distressed areas. Second, the OBBBA makes the QOZ program permanent and enhances investor incentives, including a 10% basis step-up for investments held at least five years and expanded benefits for investments in rural opportunity zones. Investments sold after a 10-year holding period will continue to be free from US federal income tax. Third, the act imposes robust new reporting and transparency requirements on both opportunity funds and the businesses they invest in, enabling regulators and the public to better assess the program’s economic and social impact.
In Depth
The re-designation process
The OBBBA made a major change to the QOZ program by introducing a system for re-designating zones every 10 years. Instead of relying on a one-time snapshot of economic conditions from 2017, the law now requires states and territories to revisit and regularly update their opportunity zone selections. The first re-designation will occur on July 1, 2026, with subsequent reviews every 10 years. The goal is to ensure that the program remains focused on communities that continue to face economic challenges. Even though the re-designation will take place on July 1, 2026, only investments made on January 1, 2027, or later can utilize the new designated zones.
Each zone designation will now have a defined lifespan. Once a census tract is selected and certified, its designation will take effect on the following January 1 and will remain in place for 10 years. After that, it must be re-designated to retain its status. This creates a more flexible system that can adjust as neighborhoods improve or conditions shift while also giving investors a clear timeline for how long a zone will qualify for tax benefits.
The OBBBA also eliminates certain legacy provisions from the original legislation. Most notably, it repeals the automatic treatment of all low-income census tracts in Puerto Rico as opportunity zones. Starting at the end of 2026, Puerto Rico will follow the same rules as the states, including the cap on the number of tracts that can be designated. This change brings consistency to the program and ensures that all designations are made using the same criteria.
The new permanent program
The OBBBA delivers on a key promise to make the QOZ program more attractive for long-term investors by making it permanent and restoring one of the most popular tax benefits: the basis step-up for capital gains. Under the revised rules, investors who hold their qualified opportunity fund (QOF) investment for at least five years will now receive a 10% increase in basis, effectively reducing the amount of deferred capital gain ultimately subject to tax. This provision, which was phased out under the original statute, is now a permanent feature of the program and intended to reward long-term commitments to underserved communities. Under the new framework, the deferral period ends either five years after the investment in the QOF is made or the date the investment is sold (whichever occurs first). The amount of gain included at the end of the deferral period is the lesser of the amount of gain excluded by investment in the QOF or the fair market value of the investment as determined as of the date the deferral period ends over tax basis (which may have increased by 10% or 30%, as discussed below).
The program’s permanence is a major shift from the original framework, which included a sunset in 2026. Investors can now enter the program with confidence that the key tax deferral and exclusion benefits will remain in place beyond that deadline. In addition to the 10% basis step-up at five years, the law preserves the original rule allowing for the full elimination of post-investment gains on investments held for 10 years or more and clarifies that this exclusion is available for up to 30 years after the initial investment.
One of the most notable enhancements is a new incentive specifically targeted at rural opportunity zones. Investors who hold their investment in a qualified rural opportunity fund for at least five years are eligible for a 30% basis step-up, triple the amount available for urban or mixed-area zones. This additional tax benefit is designed to direct more capital to rural areas, which often struggle to compete for investment because of limited infrastructure or market size.
The law defines a “rural opportunity zone” as any census tract located in a QOZ that lies outside cities or towns with populations over 50,000 and is not part of an adjacent urbanized area. In practical terms, these are small towns and rural regions that often fall outside traditional economic development corridors. By offering a more generous incentive, the OBBBA aims to level the playing field and draw more investment to areas that need it most.
The legislation also encourages investment in rural areas by easing the substantial improvement test for existing structures. For rural opportunity zones, investors only need to improve property by 50% of its adjusted basis rather than doubling the basis as required in other zones. This makes it more feasible to rehabilitate older buildings, especially in areas where property values are lower and major capital expenditures may be harder to justify.
By reinstating and expanding the basis step-ups and offering tailored benefits for rural investments, the OBBBA strengthens the appeal of opportunity zones while pushing capital toward the communities that have historically been left behind. However, the main benefit of the QOZ program remains the US federal tax-free exit after a 10-year holding period. This not only allows for a tax-free exit on the appreciation in the investment but also the depreciation recapture. Moreover, during the 10-year holding period, debt-financed distributions remain available.
The new reporting regime
The OBBBA introduces a major change to the QOZ program’s transparency and oversight by requiring detailed annual reporting from both QOF and the businesses they invest in. QOFs must file returns disclosing the value and type of assets they hold, the locations of their investments, the industries involved, and employment-related metrics such as the number of full-time equivalent employees supported by their projects. In turn, the underlying businesses are also required to provide information to the QOFs to help fulfill these reporting obligations. These measures aim to give regulators and the public a clearer picture of where opportunity zone capital is going and how it’s being used.
To enforce compliance, the OBBBA introduces meaningful penalties for failing to meet the new reporting standards. QOFs that fail to file complete and accurate reports can face daily fines, with higher limits applied to large funds. The act also mandates that reports be filed electronically, ensuring that data can be more easily aggregated and analyzed. These provisions respond directly to long-standing criticisms that the QOZ program lacked visibility into its benefits for local communities.
Beyond fund-level reporting, the OBBBA tasks the US Department of the Treasury with producing public reports on the QOZ program’s effectiveness, starting with aggregate data such as the number of funds, total investments, and geographic distribution. Over time, the Treasury will also publish more in-depth analyses measuring the economic impacts of opportunity zone investments, including job creation, poverty rates, new business starts, and housing outcomes in designated zones. These reports are designed to help policymakers, investors, and the public assess whether the program is meeting its goals and to guide future improvements.
