OBBBA Makes Enhanced Opportunity Zones Permanent

The OBBBA, signed into law on July 4, 2025, permanently extends the QOZ provisions. The QOZ provisions originally were enacted for a limited time as part of the TCJA. The OBBBA QOZ provisions generally incorporate the operative TCJA provisions with some important changes.

Overview of QOZ rules under the TCJA

The TCJA provides tax benefits for taxpayers that contribute capital gains to a qualified opportunity fund (QOF) within 180 days of recognizing those gains. The two primary benefits of investing in a QOF are:

• Deferral of taxation on the capital gains until Dec. 31, 2026 (absent an earlier inclusion event)
• The ability to recognize tax-free gain (through a fair market value basis step-up elected prior to 2048) upon the disposition of the QOF investment (or the underlying property) if the QOF investment has been held for 10 years from the date of the investment in the QOF

In addition, taxpayers can potentially exclude from recognition (through a basis step-up) 10% of the capital gains deferred if the QOF investment has been held for at least five years or 15% of the capital gains deferred if the QOF investment has been held for at least seven years.

Crowe observation

These holding periods exclude deferred capital gains from income, effectively requiring that the original QOF investment was made prior to 2022 or 2020, respectively.

To qualify as a QOF, the fund must invest, directly or indirectly, in qualified opportunity zone business property (QOZBP), which generally includes tangible property that meets all of the following requirements:

• It is purchased by the QOF.
• Its original use is in a QOZ by the QOF.
• It is used by the QOF in a trade or business in a QOZ.

Under the TCJA, states may nominate certain low-income communities (and certain contiguous tracts) as QOZs for certification and designation by the secretary of the U.S. Department of the Treasury. These designations, consisting of over 8,764 tracts, were concluded in 2018 and will expire on Dec. 31, 2028.

OBBBA QOZ rules

For investments made after 2026, the OBBBA makes the following changes to the TCJA QOZ rules:

• Replaces the TCJA fixed-date recognition (Dec. 31, 2026) with a five-year deferral of the invested capital gains (absent an earlier inclusion event).
• Adds an automatic 10% basis step-up after a five-year holding period, eliminating 10% of the deferred capital gain.
• Adds an automatic 30% basis step-up after five years for qualifying investments in qualified rural opportunity funds.
• Eliminates gain on the sale of an interest in a QOF held for at least 10 years, but only to the extent of the fair market value increase up to year 30 following the date of the investment. Under the TCJA rules, the potential elimination of gain ends on Dec. 31, 2047, regardless of when the QOF interest was acquired.

Additionally, the OBBBA relaxes the TCJA rules for the substantial improvement requirement for previously used property located in a rural QOZ. Under the TCJA rules, the required increase in the property’s basis over a 30-month period must exceed 100% of the property’s basis at the beginning of the 30-month period to satisfy the substantial improvement requirement. For substantial improvement determinations made on or after July 4, 2025, the OBBBA lowers the basis increase requirement for property located in a rural QOZ to 50%.

New designations

Under the OBBBA, new QOZ designations will occur every 10 years, with the first designations occurring July 1, 2026, to be effective Jan. 1, 2027. QOZs designated under the TCJA do not expire until the end of 2028, resulting in a two-year overlap of old and new QOZs. The criteria for QOZs under the OBBBA rules are stricter than those under the TCJA rules, so many TCJA-designated QOZs will not qualify under the OBBBA rules.

Crowe observation

Investments in QOZs designated under the TCJA rules will not become disqualified even if the TCJA-designated QOZ is not eligible for designation under the OBBBA rules.

New reporting requirements and penalties

The OBBBA adds to the list of information a QOF is required to report to the IRS, including:

• The value of its total assets
• The value of its QOZ property
• The NAICS codes that apply to its businesses
• The QOZ census tracts it invests in
• The amount invested in any QOZBP
• The value of its tangible and intangible property (and whether it is leased or owned)
• The number of residential units it owns
• The number of its full-time employees
• Investor dispositions of QOF interests, if applicable

QOZBPs will be subject to similar reporting requirements to provide the relevant information both to the IRS and to its QOF owner.

Penalties of up to $10,000 per return, or up to $50,000 for QOFs with over $10 million in assets, can be imposed for failure to timely file accurate returns. Higher penalties apply for willful noncompliance.

Looking ahead

Although new QOZ designations under the OBBBA will not be effective until 2027, taxpayers can begin planning 2027 investments into new QOZs using capital gains expected to be recognized in the last half of 2026 and invested within the 180-day period. Additionally, for TCJA-designated QOZs in rural areas, taxpayers can currently take advantage of the lower 50% basis increase requirement applicable to previously used QOZBP that has been or will be acquired.