C Client Alert: The BBBA Permanently Renews the Qualified Opportunity Zone Incentive
July 17, 2025
On July 4, 2025, President Trump signed the “One Big Beautiful Bill Act” (BBBA) into law. The BBBA contains substantial changes to the Internal Revenue Code of 1986, as amended, making many provisions of the 2017 Tax Cuts and Jobs Act (TCJA) that were scheduled to expire in 2025 permanent. The BBBA notably includes significant changes to the qualified opportunity zone (QOZ) program that make the QOZ program permanent, establishes new rules regarding designation of QOZs, provides additional benefits for projects based in rural areas and includes enhanced reporting requirements (and penalties for noncompliance).
BACKGROUND
The QOZ program was introduced as part of the TCJA to promote investment in qualifying low-income communities designated by states as QOZs. The QOZ program provides tax incentives to invest in qualified opportunity funds (QOFs), including a temporary deferral of invested capital gains, as well as a permanent exclusion of a portion of those invested capital gains and a complete exclusion on gain with respect to future appreciation of the QOF, provided certain holding periods are satisfied.
The BBBA includes a number of changes to the QOZ program, including making the QOZ program permanent, permitting states to re-designate their QOZs every 10 years, enhancing the benefit of certain QOZ investments in rural areas and including more onerous reporting and compliance requirements and penalties for noncompliance (as discussed in more detail below).
The QOZ program has been permanently extended
- Under the TCJA, investments in QOFs had to be made prior to December 31, 2026 in order to benefit from the QOZ program. The BBBA eliminates this sunset for QOZ investment, providing for indefinite investment in the QOZ program.
- Under the TCJA, any capital gains invested in QOFs are required to be recognized on December 31, 2026 (or as of an inclusion event, if earlier). The BBBA provides that, for investments made after December 31, 2026, deferred gain will be recognized as of the earlier of (i) the date on which an QOZ investment is sold or exchanged, or (ii) the 5-year anniversary of the taxpayer’s QOF investment.
- The BBBA provides that QOF investments that are held for at least 5 years result in a basis increase equal to 10% of the investor’s deferred gain (30% in the case of any investment in a QROF as discussed below).
Gain elimination capped after 30 years
The BBBA also substantially extends investors’ ability to eliminate capital gain on future appreciation from QOF investments. Any new investments are eligible for an exemption from capital gains on post-investment appreciation. This exemption is applied by providing a step-up basis to fair market value on sale after a 10-year holding period is satisfied with respect to any appreciation until the 30th anniversary of the investment. Under the TCJA, taxpayers that invest in a QOF on or before December 31, 2026, and hold their investment for at least ten years, must sell their QOZ investment on or before December 31, 2047, in order to exclude appreciation under the QOZ program.
Stricter eligibility criteria will apply to QOZ designations
With existing QOZ tract designations set to expire on December 31, 2028, the BBBA permits states to conduct a rolling 10-year nomination of new QOZ census tracts for certification and designation by Treasury beginning July 1, 2026, and each subsequent July 1 that is 10 years after the preceding determination date. Each newly designated QOZ tract retains its qualified status starting on January 1 following the date such QOZ tract was designated by Treasury and ending on the day before the date that is 10 years after the start date of the QOZ tract’s designation.
New Qualified Rural Opportunity Funds with supercharged tax benefits
Recognizing that much of the investment focus of the QOZ program has been on urban and suburban areas, the BBBA creates a new category of fund, a “Qualified Rural Opportunity Fund” (QROF), that provides investors with more generous tax benefits. A QROF is similar to a QOF, except that its 90% “good” asset test, including with respect to any QOZ business in which the QOF owns an interest, is further required to be invested in a QOZ comprised entirely of a rural area. A “rural area” is any area other than (1) a city or town with a population of greater than 50,000, and (2) an urbanized area adjacent to a city or town with a population in excess of 50,000.
The enhanced tax benefits obtained by QROFs (as compared to “standard” QOFs) include:
- a rolling 30% basis-step up after 5 years (compared to a 10% basis step-up for “standard” QOFs); and
- a reduced “substantial improvement” requirement applies, so that only 50% of adjusted basis must be reinvested in property improvements (compared to in excess of 100% of adjusted basis for “standard” QOFs).
While most QROF provisions take effect after December 31, 2026, the reduced “substantial improvement” threshold is effective immediately.
New reporting requirements and compliance
Under the TCJA, compliance requirements for a QOF were minimal, with compliance limited to filing an annual Form 8996.
Under the BBBA, QOFs are required to file detailed reports on an annual basis including the name and address of their QOZ Businesses, the classification of the businesses conducted (under the North American Industry Classification System) and information about residential units held and information regarding employees of the relevant QOF and its QOZ Businesses.
Failure to comply with these requirements results in the imposition of significant penalties. The penalty is $500 for each day that the failure continues, not exceeding $10,000 for small QOFs and up to $50,000 for large QOFs (i.e., QOFs with gross assets in excess of $10 million). Additional penalties will apply for willful noncompliance.
The Treasury Department will also be required to publish annual, detailed reports on QOFs and QROFs in an effort to provide the public with information regarding the impact and efficacy of the program.
Effective Date
While the December 31, 2026 effective date for most of the BBBA’s amendments seems far off, potential QOZ investors and sponsors should consider the upcoming designation period beginning July 2026.
We anticipate that the full implications of the BBBA will continue to unfold over the coming months with the promulgation of Treasury Regulations providing additional guidance for these new QOZ rules. In the meantime, please feel free to contact a member of the CFDB tax team with any questions or for assistance assessing how these changes may affect your QOZ investment strategies.
QUESTIONS
Please contact a member of the CFDB tax team if you have any questions regarding the BBBA.
David K. Salamon
Partner, New York
Direct: +1.646.832.5583