Opportunity Zone Updates and the 180-Day Window

If you are selling a business or property, have concentrated stock positions that you are looking to diversify, or have another source of large capital gains, a Qualified Opportunity Zone investment could help to reduce and defer taxation.

Qualified Opportunity Zones (QOZs) have long offered investors a compelling blend of tax incentives and community impact. Originally created under the 2017 Tax Cuts and Jobs Act, the QOZ program encouraged long-term private investment in low-income communities by deferring or eliminating capital gains taxes. To access these benefits, investors must invest through a Qualified Opportunity Fund (QOF), a special-purpose vehicle that holds at least 90% of its assets in QOZ property. A capital gain can be deferred into a QOF if it comes from the sale or exchange of property (including real estate, businesses, stock, and more) with an unrelated party.

In July 2025, the Opportunity Zone landscape fundamentally changed when the One Big Beautiful Bill Act (OBBBA) was signed into law, providing permanent extension of the program and a suite of structural reforms outlined below. The major updates are effective on January 1, 2027, but gains from sales in the second half of 2026 could be eligible for the new rules because of the 180-day window stipulation. A taxpayer has 180 days to invest a capital gain into a QOF, meaning that a gain realized late this year could be invested in early 2027 and deferred until 2032.

Pre-2027 Tax Benefits

For investments made before December 31, 2026 (under the original rules), investors are eligible for:

• Deferral of capital gains until December 31, 2026 (or until the QOF investment is sold, if earlier).
• 10% or 15% basis step-ups on the deferred gain if the investment is held for 5 or 7 years, respectively.
• Tax-free appreciation on gains earned from the QOF investment if held for 10+ years.

Major Changes Under the OBBBA (Effective Starting 2027)

1. Permanent Extension of the Program

The original program’s investment window was set to expire at the end of 2026. The OBBBA eliminates that sunset provision, effectively making the Opportunity Zone framework permanent.

• Redesignation Cycle: Every 10 years, governors propose new QOZ tracts; Treasury certifies them.
• Designation Lifespan: Each certified zone remains active for 10 years.

2. Rolling Gain Deferral and a Standardized 10% Basis Step-Up

Starting in 2027, new investments in QOFs will:

• Defer tax on capital gains for 5 years from the investment date (not until a fixed calendar date).
• Receive an automatic 10% basis increase at the end of that 5-year period.
• No more 15% step-up for 7-year holds—the cap is now 10%.

• Example: An investor rolls a $100,000 gain into a QOF in 2027. In 2032, they pay tax only on $90,000 of the original gain (a 10% step-up). Any appreciation beyond that remains tax-free if held for 10 years.

3. New Qualified Rural Opportunity Funds (QROFs)

To push investment toward underserved rural areas, the OBBBA introduces a QROF, which:

• Targets only QOZs in areas with fewer than 50,000 people and not adjacent to urban zones.
• Offers enhanced tax benefits:
  • 30% basis step-up after 5 years (vs. 10% for standard QOFs).
  • Substantial improvement threshold reduced to 50% of building basis (vs. 100%).

• Example: If a rural property’s building value is $4M, only $2M in improvements are required to qualify. For regular QOFs, it would need $4M+ in upgrades.

4. Tougher Zone Eligibility Criteria

Starting in 2027, the criteria for designating QOZ census tracts become more targeted:

• Tracts must now fall below 70% of the area’s median family income (was 80%).
• Anti-gentrification rule excludes tracts exceeding 125% of area median income.

• If a neighborhood’s median family income is more than 125% of the surrounding area’s average, it can’t be designated as an Opportunity Zone—even if it meets other criteria.

• “Contiguous tract” loophole repealed—adjacent higher-income tracts no longer qualify.
  • If a census tract was next to a low-income area, it could still be labeled an Opportunity Zone—even if it didn’t meet the poverty or income requirements itself. This was called the “contiguous tract” rule.
  • Now, under the OBBBA, that rule is repealed, so only areas that truly meet the low-income criteria can qualify, regardless of who their neighbors are.
• Puerto Rico blanket designation removed.
  • Under the original rules, 100% of Puerto Rico’s low-income census tracts were automatically designated as Qualified Opportunity Zones, without going through the same selection process as U.S. states.
  • Now, the OBBBA removes that blanket designation, effective after December 31, 2026. Going forward, Puerto Rico will need to follow the same zone selection and approval process as other jurisdictions.
• Impact: Fewer tracts will qualify, but those selected will likely reflect higher need and reduce policy abuse.

5. Gain Elimination Window Frozen After 30 Years

• Tax-free appreciation still applies for QOF investments held 10+ years.
• However, after 30 years, the step-up in basis is locked to that year’s fair market value.
• Prevents indefinite tax-free compounding.

• Example: If an investor holds a QOF investment for 35 years, the tax-free value is capped at the 30-year mark, not the liquidation value at year 35.

6. Enhanced Reporting Requirements

To improve transparency, the OBBBA introduces strict IRS reporting rules for QOFs and QOZ businesses:

• New disclosures include asset values, business types, census tracts, employee count, real estate use, and lease/ownership status.
• Penalties for noncompliance range from $10,000 to $50,000+, adjusted for inflation.

Each potential case is unique, and there are more rules to be aware of than what is laid out above, but an Opportunity Zone strategy could certainly be worth considering for those expecting significant gains. Please reach out if you have a potential case as we can facilitate these investments.

Material discussed is meant for general/informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions.