Qualified Opportunity Zones 2.0: Permanence, incentives and more

On July 4, President Trump signed into law the One Big Beautiful Bill Act (OBBBA), a sweeping piece of legislation with a wide range of initiatives.

One area in particular stands out for real estate professionals and investors: The permanent extension and expansion of the Qualified Opportunity Zone (QOZ) program — unofficially referred to as QOZ 2.0.

The original QOZ legislation, enacted under the 2017 Tax Cuts and Jobs Act, was designed to spur long-term investments in economically distressed communities. Despite a delayed regulatory rollout and disruptions tied to the COVID-19 pandemic, QOZ has driven billions of dollars’ worth of development across the United States. With its renewal and upgrade, the program is now a permanent fixture in the U.S. tax code — an encouraging move for real estate developers, investors, and the communities they serve.

What’s new and why it matters

Program permanence: Perhaps the most important update is that QOZ 2.0 is no longer subject to an arbitrary sunset date. Investors and developers can now confidently plan long-term projects without racing the clock.

A rolling five-year tax deferral: Under QOZ, capital gains invested into Qualified Opportunity Funds (QOFs) had to be recognized and taxed by Dec. 31, 2026. QOZ 2.0 introduces a more flexible approach: Capital gains tax is due five years after the investment date, regardless of when it occurs.

Ten percent step-up in basis after five years: QOZ 2.0 brings back the coveted 10% step-up in basis — but with an upgrade. In the previous iteration, this benefit was phased out and only applied to early investors. Now, all participants who hold their investment for at least five years receive the 10% basis increase, leveling the playing field for latecomers and incentivizing sustained investment.

The signature 100% step-up after 10 years: Investors who hold their QOF investment for at least 10 years enjoy a full step-up in basis upon sale — eliminating capital gains taxes entirely. This unique provision continues in QOZ 2.0, with the bonus that if an investor holds the asset for more than 30 years, gains accrued after the 30-year mark will be taxed; however, everything prior remains exempt.

Rural incentives and lower substantial improvement thresholds: Recognizing the development challenges in rural areas, QOZ 2.0 provides enhanced benefits for these locations. Investors in designated rural QOZs receive a 30% step-up in basis when taxes are paid and only need to improve existing structures by 50% of their current value (down from 100% in non-rural developments).

State control over zone designation: Beginning July 1, 2026, state governors and economic development agencies may designate or retire QOZs every 10 years. This allows for recalibration and ensures that truly disadvantaged areas continue to receive support. New designations must be finalized by Jan. 1, 2027, when QOZ 2.0 will officially take effect.

Improved reporting requirements: A key criticism of the original legislation was the lack of transparency. QOZ 2.0 addresses this with built-in reporting obligations — hopefully structured in a way that provides clarity without burdening investors or fund managers with excessive compliance.

What didn’t make the cut

Despite strong support from industry leaders, QOZ 2.0 won’t take effect until Jan. 1, 2027, potentially creating an 18-month dead period between programs. Many investors may choose to delay investments to take advantage of the better terms in QOZ 2.0. However, as Jimmy Atkinson of OpportunityZones.com points out, QOZ still has strong appeal:

• an earlier clock start for the 10-year hold period,
• certainty in zone maps, and
• more mature infrastructure in existing zones.

Another notable change is a stricter eligibility requirement for new QOZs. The qualifying threshold has shifted from 80% of the state median income to 70%, reducing the number of eligible census tracts by an estimated 22%.

The bonus depreciation advantage

Another powerful incentive is the 100% bonus depreciation for newly constructed manufacturing facilities. This will apply nationwide and allow owners to deduct the full value of facilities, fixtures, and equipment in the first year — a move aimed at reviving domestic manufacturing. When the facility is eventually sold, the owner must recapture the depreciation but has had the benefit of using those funds throughout the holding period — essentially gaining up-front tax savings that can be reinvested into the business or project.

Here’s where it gets interesting: When combined with a QOF investment, the depreciation strategy becomes even more powerful. Typically, investors in QOFs don’t gain basis until they pay deferred taxes (after five years), or unless they personally guarantee a project loan. Once basis is established, they may then take the 100% depreciation deduction.

If that asset is held for over 10 years in a QOZ, the investor enjoys a 100% step-up in basis at the time of sale — meaning no depreciation recapture.

A final word

As always, QOZ participation should be approached with careful planning. Partner with a knowledgeable CPA and experienced attorney to ensure proper structuring and compliance with IRS regulations.

Attorney Coni S. Rathbone is of counsel at VF Law. She works in the firm’s business and real estate practice groups. Contact her at 208-469-3773 or [email protected].