Qualified Opportunity Zone Enhancements and Expansion under the “One Big Beautiful Bill Act” (OBBBA)

By Matthew Landon July 17, 2025

Note:  This article is one of many that BNN is publishing to cover the tax features of the so-called “Big Beautiful Bill.”  Each one is authored by one of BNN’s own tax professionals.  Our coverage includes a summary article that briefly describes many of the bill’s features and many more that are deeper dives into specific areas of interest to our clients.  A topical list of those in-depth articles may be found at the front of our summary article.

Introduction

Qualified Opportunity Zone (QOZ) designations were originally introduced as part of the Tax Cuts and Jobs Act of 2017 (TCJA).  The purpose of adding the QOZ legislation was to encourage investments in economically distressed areas across the US, with an emphasis on promoting economic growth and job creation in low-income communities.  As a result, taxpayers could realize investment tax benefits by deferring eligible gains, with the prospect of receiving a basis step-up on previously realized but unrecognized gains as well as benefitting from potentially unlimited income tax-exemption on the future appreciation of certain long-term investments, for a period of up to 30+ years.

With nearly 10 years in the rearview mirror since TCJA established the QOZ program, Congress has moved to cement this legislation as a permanent fixture in the Code, with certain modifications, through the One Big Beautiful Bill Act (BBB) that was signed by the President on July 4, 2025, which provides for decennial opportunity zone designations on a rolling basis, beginning July 1, 2026, with the newly redesignated QOZ investments effective as of January 1, 2027.

Original TCJA legislation benefits

Under the prior legislation, the ability to make new QOZ investments was originally set to expire on December 31, 2026. These tax benefits included –

1. A temporary deferral of any capital gain on the sale of property if the gain is reinvested in a Qualified Opportunity Zone Fund within 180 days of the sale.
2. Reduction of the deferred gain ultimately recognized (accomplished through a basis step-up), resulting in a permanent exclusion of up to 15% of the previously deferred gain, as follows:
   1. If the QOZ investment is held for at least 5 years (prior to mandatory recognition on December 31, 2026), 10% of the deferred gain is allowed as a basis step-up.
   2. If the QOZ investment is held for at least 7 years (prior to mandatory recognition on December 31, 2026), an additional 5% of the deferred gain is added to basis.
3. If the QOZ investment is held for at least 10 years, the taxpayer may elect to step-up the basis in the investment to Fair Market Value. This would potentially result in no taxable gain on the sale in connection with appreciation in the investment and allow for a permanent exclusion from income. A taxpayer has the option to make this election effective through the earlier of the date of sale or exchange, or as of December 31, 2047.

OBBB legislation changes and benefits

Beginning on January 1, 2027, the BBB brings some enhanced updates to Opportunity Zones. One of the biggest changes? The introduction of an entirely new category of Opportunity Zone, which is designated as a Qualified Rural Opportunity Zone (QROZ).

Newly Designated Qualified Opportunity Zones

1. The core framework of QOZs established by TCJA (as noted above) is reinstated – deferral of capital gains, step-up in basis, and exclusion of gains in appreciation after 10 years.
2. QOZs are made permanent under the Internal Revenue Code.
3. A rolling 5-year recognition period is provided for gains deferred into the QOZ investment.

Qualified Rural Opportunity Zones (QROZ)

These are a special type of Opportunity Zone, specifically designated to promote growth in rural and underserved communities. The legislation defines a rural area for QROZ purposes as any area other than a city or town that has a population of greater than 50,000 inhabitants, and any urbanized area contiguous and adjacent to such a city or town. They follow a similar framework as QOZs but come with a few extra tax perks:

1. After a QROZ is held for 5 years, 30% of the deferred gain is allowed as a basis step-up, which is 3x the amount of gain deferral benefit a normal QOZ designation offers.
2. After being held for 10 years, the taxpayer may elect a step-up to the FMV, potentially resulting in no taxable gain on unrealized appreciation earned while invested in the QROZ, similar to original QOZs.
3. QROZ property also has a special provision pertaining to real estate investments. Under a traditional QOZ, there is an “original use” provision that requires substantial improvement to an existing structure (excluding the cost of land).  If qualifying as a QROZ, the substantial improvement threshold to the qualifying basis of existing structures is reduced from 100% down to 50%.

How can you capitalize on the new legislation?

The recently enacted BBB brings a host of new tax advantages, particularly for real estate investors. Whether you’re planning to sell property, reinvest capital gains, or undertake a major rehabilitation project, this legislation offers powerful tools to help you grow your investments while maximizing investment returns.

As we touched upon above, QOZ vehicles allow investors to defer capital gains taxes by reinvesting those gains into designated opportunity zones within 180 days of realization. This applies not only to gains from real estate, but also from capital gains resulting from the sales of other assets, such as marketable securities and closely held businesses.  Also worth noting: If an investor in a partnership is allocated a share of capital gain, the 180-day clock starts running from the partner’s choice of: (a) the last day of the partnership’s tax year which included the realized gain, (b) the date the partnership’s 180-day period begins, or (c) the original due date of the partnership’s tax return pertaining to the year in which the gain was realized (typically March 15^th of the following year for calendar year partnerships).  For example, if a calendar year partnership sells a building on 1/1/26 and reports the capital gain to its partners on the Schedule K-1 for the year ending 12/31/26, a partner has up until 9/11/27 to reinvest their share of the gain into a QOZ (i.e. 180 days from 3/15/27).

In the real estate context, an investor must often contend with depreciation recapture upon the sale of an investment.  This “problem” may be exacerbated by the BBB bringing with it the reinstatement of 100% bonus depreciation for property placed in service after January 19, 2025.  Investors can often front-load deductions and reduce current taxable income through claiming bonus depreciation.  However, by leveraging the special provisions conferred through making a QOZ investment, when the QOZ asset reaches the 10-year holding period and is subsequently sold, the basis step up also eliminates the depreciation recapture exposure.  When considering the time value of money and the related upfront tax savings of accelerated depreciation with zero recapture on disposition, what once was a timing issue for tax rate arbitrage is now another way to permanently amplify investment returns.

Typically, taxpayers aren’t allowed to take bonus depreciation directly on building assets (aside for some new exceptions under BBB for Qualified Production Property).  This makes the ability to leverage cost segregation studies even more valuable.  These studies break down a building into its individual components by reclassifying some of them into shorter-lived asset categories (typically 5, 7, or 15 years), which makes them eligible for bonus depreciation.  Absent a study, most of a property’s value is typically allocated between the building and land, which stretches depreciation deductions over much longer periods (or provides for no deduction at all, in the case of land).  Taking advantage of bonus depreciation can free up additional after-tax cash flows for real estate investors who are looking to continually redeploy available capital into making new investments.  While certain businesses that are subject to the Section 163(j) business interest expense limitation who make an electing real property trade or business (RPTOB) election to avoid limiting deductible business interest are precluded from taking bonus depreciation on Qualified Improvement Property (QIP), items identified as personal property or land improvements would still be eligible.  Additionally, the value of making an electing RPTOB may be diminished in light of the OBBBA putting EBITDA back on the table for computing the 30% ATI limitation.

Qualified Rural Opportunity Zone investments offer expanded tax benefits for investors.  Besides the potential 30% step up on the investment deferral, another important aspect that sets apart a QROZ from a QOZ is the capital outlay required to meet the “substantial improvement” test in complying with the “original use” property requirement.   A typical QOZ investment requires substantial improvement of an existing property within a 30-month period by investing an additional 100% of the qualifying basis into the building. This can be a substantial hurdle which often results in the property needing to be essentially entirely redeveloped. Alternatively, QROZ improvements must only achieve a 50% threshold to meet the original use test.  This significantly lowers the barrier for entry and makes it more feasible to rehabilitate these properties without needing to completely redevelop them.

Another tax planning point available through leveraging a QOZ investment is dealing with the 5-year lookback on Section 1231 loss recapture.  A taxpayer who realizes a Section 1231 gain normally treats this as a capital gain, unless there are prior Section 1231 losses claimed in the past 5 years, which converts Section 1231 capital gains recognized in the recapture period into ordinary gains taxed at a higher rate.  By deferring Section 1231 gains into an opportunity zone investment, a taxpayer could wait out an applicable loss recapture period for recognizing Section 1231 gains to maintain its capital gain status when the gain is ultimately recognized.

While the tax incentives offered here are compelling, it’s also important to consider the broader investment environment for today’s real estate market.  Over the past few years, interest rates have more than doubled, creating a higher cost of capital and debt service burdens for investors and developers alike. Many investors have been waiting for interest rates to drop or biding their time for what in some people’s opinion is an over-heated housing market looking to find correction.  As always, it’s important for investors to remember they can’t let the tax tail wag the economic investment decision.  Something that may otherwise turn into a bad investment deal is still potentially a bad investment deal.  It’s important to identify a QOZ/QROZ that aligns with your strategic investment goals.  Whether investing directly in QOZ businesses or through a fund, due diligence is key to ensure the particular investment is the right fit for your business objectives or investment portfolio.

Conclusion

Beyond the tax incentives and investment returns, opportunity zones bring the potential for new domestic jobs, local businesses growth and additional housing availability to many underserved communities across the United States.  Working closely with your tax advisor can help ensure you’re in the best position to capitalize on aligning these policy objectives with appropriate investment decisions.  Along with the expanded tax benefits offered by opportunity zones comes stricter IRS compliance requirements and a new penalty regime for enforcement.

As with any tax-advantaged strategy, the key to maximizing these benefits lies in thoughtful planning and timely execution.  To explore how these strategies might work best for you, please contact Matthew Landon mlandon@bnncpa.com or your BNN tax advisor today.