Qualified Opportunity Zones Made Permanent Under Reconciliation Bill

The enactment of the One Big Beautiful Bill Act (OBBBA) introduces a host of new provisions that investors and fund managers should carefully consider. Among the most impactful are the updates to the Qualified Opportunity Zone (QOZ) rules bringing both expanded benefits and potential new challenges. These provisions were set to expire on December 26, 2026, however the OBBBA updates them and makes them permanent. To understand the significance that the OBBBA has on the QOZ provisions, it is important to understand the background of the program. 

Originally established under the Tax Cuts and Jobs Act of 2017 (TCJA), the Qualified Opportunity Zone (QOZ) program was designed to incentivize long-term investment in economically distressed communities. Investors who participate in a Qualified Opportunity Fund (QOF) under the TCJA could benefit from several significant tax incentives.  

Qualified Opportunity Zone Property 

The investments made by a QOF are required to be made in Qualified Opportunity Zone Property (QOZP). The QOZP can be qualifying real estate, operating businesses, and partnership interest or stock of companies that operate in opportunity zones. A QOF and its underlying investment are subject to IRS reporting requirements to certify that all investment requirements are met. The IRS imposes penalties on entities that do not meet the investment standards. 

Gain Deferral 

Investors have the opportunity to invest proceeds from realized capital or 1231 gains into a QOF and obtain a deferral of that income. Under the TCJA, the gains could be deferred until December 31, 2026, or the date that the investment inside the QOF was disposed of.  

Partial step-up in investment basis 

Investors who have invested eligible gains info a QOF may qualify for a step-up in basis related to their deferred gain. The TCJA stipulated two holding periods for this benefit. After 5 years, an investor would receive a 10% step up, and after 7 years an investor would receive an additional 7% step up. This step-up in basis results in a permanent gain exclusion of an investors eligible gain investment and is a benefit of a QOF investment that is no longer available under the original rules due to the expiration of the QOZ provisions as they were originally enacted. Under the original rules, only investors who contributed eligible gains to a QOF prior to January 1, 2022, were eligible for this benefit due to the holding period requirements. 

Permanent exclusion from income of QOF appreciation 

The QOF benefit with the most potential upside is that investors have the opportunity to sell their QOF investment and exclude any gains from the sale from income making it tax free. If an investor made an investment of eligible gains into a QOF under the TCJA between 2018 and 2026 and holds the investment for a minimum of years, prior to the sale of that investment, they will receive a step-up in basis to Fair Market Value of that investment on the date of sale, or December 31, 2048, which ever is sooner.

QOF Compliance 

These tax benefits, however, come with important compliance requirements intended to ensure that the program achieves its intended economic impact. On an annual basis, the IRS requires that a QOF must maintain at least 90% of its assets in Qualified Opportunity Zone property. The test is calculated based on an average of the 6 month and 12-month value of the QOF’s assets. On the surface, this requirement may seem simple, but it is important for fund managers to be aware of the testing dates and manage the investments effectively to avoid penalties. 

Other requirements for QOF investments are specific to the type of investment the QOF has entered into. For real estate investments, the property must be either original use property or substantially improved. The IRS defines the term, substantially improved, in this context to mean that the fund must invest an amount equal to or greater than the property’s original adjusted basis into its rehabilitation. 

These rules are critical for both maintaining eligibility and maximizing the benefits of the program. 

The permanency and expansion of the Qualified Opportunity Zone program under the OBBBA marks a significant evolution in tax-incentivized investing. While these changes create meaningful opportunities, they also introduce new complexities. As always, the underlying economics of an investment must remain the priority. 

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