“One Big Beautiful Bill” Impacts on QOZs

Published: Jul 14, 2025
By: Avi Jacob; Michael Torhan
Topics: Tax Legislation

Credits & Incentives
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Introduced as part of the Tax Cuts and Jobs Act of 2017, the Qualified Opportunity Zone (QOZ) program was established to provide a tax incentive for private, long-term investment in economically distressed communities.

A QOZ is a community nominated by the state and certified by the Treasury Department as qualifying for this program. The Treasury Department had previously certified zones in all 50 states, Washington, D.C., and US territories. A list of these existing designations can be found at the U.S. Department of Housing and Urban Development.

To assist taxpayers with navigating the various requirements of the QOZ program, Qualified Opportunity Funds (QOFs) were created, allowing taxpayers to take advantage of the QOZ program. By utilizing this vehicle for investing, taxpayers have been able to temporarily defer tax on gains, eliminate up to 15% of the tax on deferred gains, and obtain a potential exclusion from tax in the future on the gain generated from the appreciation of the investment in the QOF after holding such investment for 10 years.

On July 4, 2025, the “One Big Beautiful Bill” Act was signed by President Trump and therefore became law. There are significant impacts on the QOZ program as a result of the new tax law that was enacted.

Key Takeaways

The "One Big Beautiful Bill" Act permanently extends the QOZ program, replacing the previous fixed expiration with new decennial designations.
New, stricter eligibility criteria will apply to QOZ designations, with a focus on genuinely distressed communities and elimination of contiguous tracts.
Taxable recognition of deferred gains, also known as inclusion events, will generally occur five years after investments into QOFs are made (if such investments are not sold earlier).
Investments in Qualified Rural Opportunity Funds (QROFs) now offer enhanced tax benefits, including a 30% basis step-up and reduced substantial improvement requirements.
Increased reporting requirements for QOFs and QOZ businesses aim to boost transparency and accountability within the program.

Existing QOZ Tax Law Under the TCJA

To qualify as a QOF, an investment vehicle must be organized as a corporation or partnership for the purpose of investing in QOZ property. To be considered compliant, the QOF must have 90% of its assets invested in QOZ property, either through a QOZ business (QOZB) or held directly by the QOF. The 90% rule is calculated as the average percentage invested in QOZ property, which is measured on the last day of the first six-month period of the QOF’s taxable year and on the last day of that taxable year.

The deferral period for investments in QOF is set to expire on December 31, 2026, which means that the amount of deferred gains that are required to be included in income by taxpayers will need to be included on taxpayers’ 2026 tax returns. Likewise, the original QOZ designations are set to expire on December 31, 2028.

Under the existing QOZ tax law, taxpayers were eligible for up to a 15% basis step-up on deferred gains if held for 7 years (10% if only held for 5 years), meaning ultimate inclusion of deferred gains in 2026 may not be 100% of the originally invested gains.

Key Changes to QOZ Tax Law Under the “One Big Beautiful Bill” Act

The following table describes key changes to the QOZ program going forward as a result of the new tax law signed on July 4, 2025.

Subject	Final Bill
QOZ Program Extension	The QOZ program has been permanently extended, with new 10-year QOZ designation periods going forward. A new term, “Decennial Determination Date,” will drive the QOZ designation process. These dates are defined to begin with July 1, 2026, and then will include each July 1 occurring 10 years after the prior decennial determination date.
QOZ Designations	QOZ designations are to be started by States within a 90-day period (subject to a 30-day extension) after each Decennial Determination Date. QOZ designations will be in effect from the “Applicable Start Date,” which is January 1 (of the year subsequent to the year of designation), and will expire on the day before the 10-year anniversary of the start date. New QOZ designations need to follow a narrower definition of low-income communities by limiting the areas that qualify. Contiguous tracts will no longer be eligible for designation. Special designation benefits for Puerto Rico will be eliminated as of December 31, 2026.
Recognition of Deferred Gains	Deferred gains invested into a QOF prior to January 1, 2027, are recognized in taxable income on the earlier of 1) the date that such investment is sold or exchanged, or 2) December 31, 2026. For deferred gains invested into a QOF after December 31, 2026, the year of taxable inclusion is the earlier of 1) the date that such investment is sold or exchanged, or 2) the date which is five years after the date the investment into the QOF was made.
Basis Step Up	Unlike the TCJA, the deferred gain basis step-up is now limited to 10%, applicable when investments are held for at least 5 years. An exception to this general rule is that the deferred gain basis step-up is 30% for investments in Qualified Rural Opportunity Funds (“QROFs”).
Determination of Qualified Opportunity Zone Property	Original QOZ tax law stated that QOZ business property needs to be acquired for purchase by a QOZ fund, QOZ partnership, or QOZ corporation after December 31, 2017. Under the new QOZ tax law for property acquired after December 31, 2026, QOZ business property needs to be acquired for purchase by a QOZ fund, QOZ partnership, or QOZ corporation after the Applicable Start Date with respect to the QOZ (i.e., after January 1 of the year in which the QOZ designation is effective).
10-Year Basis to FMV Step-Up Benefit	One of the most significant tax benefits for the QOZ program is the potential to eliminate federal income tax on post-investment appreciation if a QOF investment is held for at least 10 years. The basis to FMV step-up after a QOF investment is held for at least 10 years uses FMV that is based on when the investment is sold: If the QOF investment is sold before the 30th anniversary of the date of the investment, the FMV of the investment on the date of sale is used (i.e., the basis is stepped up to FMV on the date of sale, thereby eliminating any gain). If the investment is sold on or after the 30th anniversary of the date of the investment, the FMV of the investment on the 30th anniversary is used (i.e., the basis is stepped up to the FMV on the date of the 30th anniversary); therefore, there may be some taxable gain if the investment further appreciates after such anniversary.

Incentivizing Rural Development with Qualified Rural Opportunity Funds (QROFs)

Under the new QOZ program, there is a push to incentivize more investment in rural areas. One major benefit is the increase in the deferred gain basis step-up from the default 10% to 30% for investments held for at least 5 years.

In order to qualify, investments will need to be made into QROFs. A QROF is a QOF that holds at least 90% of its assets in QOZ property which is 1) QOZ business property substantially all of the use of which, during substantially all of the QOF’s holding period for such property, was in a QOZ comprised entirely of a rural area, or 2) QOZ stock or QOZ partnership interest in a QOZ business in which substantially all of the tangible property owned or leased is QOZ business property and substantially all the use of which is in a QOZ comprised entirely of a rural area.

The term rural area for this purpose is defined as any area other than 1) a city or town that has a population of greater than 50,000 inhabitants, and 2) any urbanized area contiguous and adjacent to such a city or town.

A second major benefit of investing in rural areas is that the substantial improvement requirement for QOZ property is reduced to only 50% of the original depreciable basis, rather than the generally required 100%, in the case of property in a QOZ that is comprised entirely of a rural area.

New QOF and QOZ Reporting Requirements

The “One Big Beautiful Bill” includes provisions relating to additional reporting requirements at the QOF and QOZ business levels as well as penalties for non-reporting.

Some of the updated/additional reporting requirements for QOFs include the following:

With respect to each investment held by a QOZ fund in QOZ stock or a QOZ partnership interest:
- Value of property owned, and value of property leased by such corporation or partnership
- Approximate number of residential units (if any) for any real property held by such corporation or partnership
- Approximate average monthly number of full-time equivalent employees of such corporation or partnership for the year, or such other indication of the employment impact of such corporation or partnership as determined appropriate by the Secretary.

With respect to items of QOZ business property held by a QOF
- Whether the property is owned or leased,
- In the case of real property, the number of residential units (if any)
- Average employee number (or other employment impact indication) for the trades or businesses of the QOZ fund in which QOZ business property is held

A key reporting update at the QOZ business level is that a QOZ business will be specifically required to report to a QOF information needed for the QOF to comply with its own reporting requirements.

Strategic Implications and Your Next Steps

Although modifying eligibility requirements and increasing reporting requirements, the new QOZ program furthers the government’s commitment to incentivizing investments in distressed communities by renewing the QOZ program as a permanent system for tax-saving opportunities.

With the addition of benefits for investments in rural areas, the QOZ program also encourages investors to consider investment opportunities in areas outside of cities.

Taxpayers and funds looking at substantial investments after December 31, 2026, will need to ensure that their investments will still be considered eligible and under which program once the new QOZ designations are determined. There are potential tax planning opportunities, and therefore, consultation with tax professionals is highly recommended.

Don't navigate these complex changes alone. Connect with our experienced tax professionals to understand how the updated QOZ program affects your current and future investment strategies and to identify tax-saving opportunities tailored to your specific situation.