by Kenan Fikri
Anyone planning to make a location decision in the coming years should be paying attention to Opportunity Zones, the federal capital gains tax incentive designed to drive productive investment into low-income areas across the country.
The One Big Beautiful Bill Act (OBBBA) made Opportunity Zones (OZs) a permanent feature of the U.S. tax code. First established in the Tax Cuts and Jobs Act (TCJA) of 2017, OZs have driven more than $100 billion in private capital into targeted communities — the over 8,000 census tracts nominated by governors across all 50 states and U.S. territories. The OBBBA calls on governors to designate a new round of OZ tracts by next summer. The bill also made a number of changes to the incentive structure to make it easier to use, and it included special inducements to put capital to work in distressed rural areas in particular.
A Big Opportunity
OZs were borne out of the geographically unequal recovery from the Great Recession. The tax provisions are designed to channel private capital to the distressed parts of the country that markets, left alone, systematically under-serve.
In the first five years alone, the OZ tax incentives had been deployed in an estimated tens of thousands of projects across 5,300 census tracts. Real estate is the predominant but by no means exclusive use case. The model OZ project may be a multifamily residential development in a mid-sized city, but the hallmark flexibility of the incentive means it has been deployed in a wide diversity of contexts. More than one-third of all investment has flowed into sectors beyond real estate, according to IRS data.
In Alabama, local investors have used OZ capital to build spec industrial space along I-85 to bring good jobs to a depressed region. Outside Columbus, Ohio, state and federal OZ incentives came together to support the construction and outfitting of a new manufacturing facility dedicated to bringing personal protective equipment (PPE) manufacturing back to the United States. In northern New Hampshire, OZ capital helped construct a sustainable agriculture greenhouse facility in a rural region. In the Southwest, OZ investment has been deployed in solar energy developments, critical mineral facilities and more. In Detroit, OZ investors were able to preserve jobs and keep a divested auto supplier local by acquiring new space and equipment in a nearby OZ. Across the country, corporations or their owners have deployed proprietary capital gains into their firms’ physical expansions.
To put it simply, wherever there’s a role for equity capital in investment financing, there’s an opening for OZs. And because OZs are all about stimulating new economic activity in an area, the rules are highly conducive to greenfield investments, structural rehabilitations and even the acquisition of capital equipment (or qualified OZ business property, in the jargon).
What’s New
The OBBBA included some important adjustments to the incentive structure that will make it easier to invest in OZs. Starting in 2027, OZ investors will be eligible for a series of three tax benefits:
- A standard rolling 5-year tax deferral on any realized capital gains deployed into a Qualified Opportunity Fund (or QOF, a special corporate entity or partnership that must be stood up to utilize the incentives), starting at the date of investment.
- A 10% step-up in basis on the deferred capital gain when the tax bill comes due in five years.
- And the long-term incentive — tax-free capital gains on OZ investments held for 10 years or longer — remains in place, ensuring that any investors who take advantage of OZs are committed to community revitalization for the long haul.
The combination of a rolling deferral with a standard step-up is an improvement on the TCJA-era rules and will allow taxpayers to enter an OZ investment whenever it makes business sense for them.
Importantly, the tax benefits for investing in rural OZs are even greater. Instead of that 10% step-up in basis on deferred gains, investors in qualified rural opportunity funds (QROFs) will receive a 30% step-up. Even under TCJA rules, rural areas demonstrated a competitive advantage in attracting OZ capital into operating business activities. This enhanced incentive should help further level the playing field and allow rural OZs to better compete with urban ones for investment.
In addition, OZ investors acquiring existing property in rural areas are now subject to a 50% substantial improvement threshold going forward, compared to the 100% threshold that will apply in urban areas (and was the standard under TCJA rules). That means investors acquiring existing property in a rural OZ will only need to invest half of its value again for it to qualify as an OZ compliant investment. That should better align the incentive with the economics of investing in rural areas, structures and businesses.
Most of these new rules won’t come into effect until January 1, 2027. The lowering of the substantial improvement threshold for rural investments is the exception, effective at the date of enactment. In the meantime, OZs remain open for investment under TCJA-era rules.
The next big milestone comes in summer 2026, when governors will nominate a new round of census tracts for OZ status. These new designations will go into effect in 2027 and last a decade. The OBBBA also tightened the definition of what it means to be a low-income community. As a result, most governors will have fewer, more economically distressed census tracts to designate.
These maps will guide billions of dollars of private capital over the coming years. Selecting future OZs presents governors with a huge, rare opportunity to shape the landscape of investment in their states. Governors have a responsibility to work closely with local officials to define a map that balances genuine need with real economic potential. OZ designation does not guarantee investment, but granted to the right communities with the right amount of economic potential, it can be transformative.
Put It All Together
Combined with other features of the OBBBA such as 100% bonus depreciation, OZs are poised to become a much more important staple of industrial financing in the United States. The OZ tax incentives are available to any U.S. taxpayer with a capital gain and engaged in qualifying investment activities in qualifying census tracts. The rules require that OZ investments come in as equity, are patiently held and stimulate real economic activity — it’s as plain and simple as that. This flexibility in who can use it and how makes it one of the most versatile federal tax incentives and financing mechanisms out there.
Rebuilding the nation’s productive capacity in left-behind regions and for the people who live there has never been more important. OZs are a tax tool to meet the moment.
Kenan Fikri is a Senior Fellow at the Economic Innovation Group, a bipartisan research and policy organization in Washington, DC, that originated the idea behind Opportunity Zones.
Kenan Fikri
Senior Fellow, Economic Innovation Group