The Opportunity Zone program (the “OZ Incentive Program”), launched under the 2017 Tax Cuts and Jobs Act, was designed to spur economic development in distressed communities by offering tax incentives to investors. As part of its extension and modification of the 2017 Tax Cuts and Jobs Act, the U.S. Congress is currently considering significant revisions to the OZ Incentive Program. This update explains the current legislation being considered in the U.S. Senate as of the morning of June 30, 2025.
One of the most significant changes is the introduction of a decennial redesignation process. Under the original framework, states made a one-time designation of Qualified Opportunity Zones (“QOZs”) based on 2010 census data, with no mechanism for updating or revising those zones. Additionally, under the original program, states could designate census tracts “contiguous” with certain low-income communities as QOZs. The new legislation would mandate that QOZs be re-evaluated every 10 years, beginning July 1, 2026. This ensures that designations remain aligned with current economic conditions and community needs, rather than being locked into outdated data. How compliance for Qualified Opportunity Funds (“QOFs”) that invest into QOZs that later lose its QOZ designation is not directly addressed by the proposed legislation, but we would expect that Treasury guidance or an amendment offered in the legislative process would explain how QOFs treat investments that were originally made into QOZs that later lose their QOZ status.
The criteria for designating QOZs have also been tightened. The contiguous tract rule has now been repealed. Instead, the new law would require that designated tracts meet stricter standards: either a median family income below 70% of the state or metro median, or a poverty rate of at least 20% combined with income below 125% of the median. These changes are designed to ensure that benefits from the OZ Incentive Program are directed to genuinely underserved communities.
On the tax side, the legislation would make the OZ Incentive Program more attractive to long-term investors while also simplifying the rules. The previous sunset date for deferring capital gains—December 31, 2026—would be eliminated. Under the proposed legislation, investors could defer gains for up to five years or until the investment is sold, whichever comes first.
The basis step-up provisions have also been enhanced. Under the original rules, investors could increase their basis by 10% after five years and 15% after seven years. The new legislation retains the 10% step-up for five-year holdings but introduces a 30% step-up for investments in Qualified Rural Opportunity Funds (a “QROF”). The additional 5% step-up basis after seven years would be repealed, but the five-year holding period would be applied on a rolling basis, rather than terminating at a set date as that incentive is applied now with a December 31, 2026 cut-off.
The proposed legislation also affirms that, upon holding an investment for at least 10 years, there is an additional step-up in basis equal to the fair market value. However, the proposed legislation also clarifies that if an investment in a QOF is held for more than 30 years, the fair market value step-up in basis will only be for the fair market value as of the 30thanniversary of the investment, which serves to clarify the existing 2047 cutoff in the OZ Incentive Program Treasury Regulations.
A QROF would be a specialized type of Qualified Opportunity Fund designed to channel investment into economically distressed rural areas. To qualify as a QROF under the proposed legislation, the fund must hold at least 90% of its assets in qualified opportunity zone property located entirely within rural-designated QOZs. These zones are defined as areas outside cities or towns with populations over 50,000 and not adjacent to urbanized areas. QROFs benefit from enhanced tax incentives, including a 30% basis step-up for investments held at least five years—triple the standard 10% increase available in other QOZs. Additionally, the legislation reduces the substantial improvement requirement for existing structures in rural zones to 50% of the adjusted basis, making it easier to rehabilitate properties and stimulate development in underserved rural communities.
The legislation would also modify what qualifies as Qualified Opportunity Zone Property. It would update the acquisition date requirements to align with the new designation schedule and introduces a special rule for improving existing structures in rural areas. In these zones, only 50% of the adjusted basis must be invested in improvements, lowering the barrier for revitalizing existing buildings.
The legislation would also impose additional reporting requirements on QOFs and Qualified Opportunity Zone Businesses. QOFs would file detailed annual reports that include information on the value and location of their investments, the industries they support, and the employment and housing impacts of their projects. Qualified Opportunity Zone Businesses would also have new reporting requirements, with reports submitted primarily to the QOFs, creating a comprehensive data ecosystem around the OZ Incentive Program.
To enforce these requirements, the legislation introduces stiff penalties for noncompliance—up to $50,000 for large QOFs, with even higher fines for intentional violations. All reports must be filed electronically, ensuring that data is accessible and analyzable. These measures aim to close the information gap that has hindered public evaluation of the OZ Incentive Program’s effectiveness.
#Chapter #Opportunity #Zones