Opportunity Zones

The Tax Cuts and Jobs Act (TCJA), enacted on December 22, 2017, added Opportunity Zones to the Internal Revenue Code. Later, the One Big Beautiful Bill Act, signed July 4, 2025, made the program permanent.

No. The U.S. Treasury designated the first Opportunity Zones in April 2018. Zones now cover portions of all 50 states, the District of Columbia, and five U.S. territories.

Opportunity Zones encourage long-term private investment in designated low-income communities to promote economic development and job creation.

For investments made before January 1, 2027, investors may defer eligible capital gains invested in a Qualified Opportunity Fund (QOF) until the earlier of the date they sell or exchange the QOF investment, or December 31, 2026. As a result, investors still holding at that point must recognize the deferred gain in tax year 2026. In addition, the original 5-year and 7-year basis step-ups no longer apply.

For investments made on or after January 1, 2027, however, investors can defer gains for up to five years, and those who hold the full five years receive a 10% basis step-up (30% for Qualified Rural Opportunity Funds).

Under both sets of rules, investors who hold a QOF investment for at least 10 years may exclude post-investment appreciation from federal capital gains tax upon sale through a basis step-up election.

A Qualified Opportunity Fund is an investment vehicle organized as a partnership or corporation for the purpose of investing in qualified Opportunity Zone property.

The Opportunity Zone program no longer has an end date. Current zone designations remain in effect through December 31, 2028, and new designations take effect January 1, 2027. After that, states redesignate zones every 10 years.

Investors in the original program may elect the 10-year appreciation exclusion through December 31, 2047. For investments made after 2026, by contrast, the exclusion applies to appreciation through the investment’s 30th year.

To substantially improve property, a QOF (or its subsidiary) must, during a 30-month period, make additions to the adjusted basis of the building (excluding land) that exceed the building’s basis at the beginning of that period. However, a QOF does not need to substantially improve the land itself.

A partnership may elect to defer eligible capital gain at the entity level. If the partnership does not elect deferral, then a partner may elect to defer their distributive share.

The partner’s 180-day investment period generally begins on the last day of the partnership’s taxable year, unless the partner elects to use an alternative start date permitted under Treasury regulations.

The QOZ Program encourages long-term investment in designated low-income communities by providing tax incentives for eligible capital gains invested through Qualified Opportunity Funds.

A QOZ is a census tract that a state governor selects and the U.S. Department of Treasury certifies. Under the original program, governors could nominate up to 25% of eligible low-income communities within their state.

A census tract generally qualifies if the poverty rate is at least 20%, or the median family income does not exceed 80% of the applicable area median income (subject to specific metropolitan and non-metropolitan rules).

For zones designated starting in 2027, however, the income test drops to 70%, and tracts qualifying on poverty rate must also have a median family income no higher than 125% of the area median.

There are approximately 8,700 designated Opportunity Zones across all 50 states, the District of Columbia, and several U.S. territories. Zones include rural, suburban, and urban areas.

A QOZB must meet several requirements, including:

• At least 70% of tangible property must be Qualified Opportunity Zone business property.
• At least 50% of gross income must come from the active conduct of business within a QOZ.
• No more than 5% of assets may consist of nonqualified financial property.
• The business generally may not be a “sin business” (e.g., gambling facilities, liquor stores, etc.).

Eligible capital gains must arise from the sale or exchange of property with an unrelated party (generally no more than 20% common ownership) and must count as capital gain for federal income tax purposes. In addition, investors must invest the gain in a QOF within 180 days of recognition.

Eligible gains may arise from many types of assets, including stocks and securities, real estate (investment or business property), business interests, and tangible and intangible investment property.

Eligible taxpayers include individuals, C corporations (including RICs and REITs), partnerships, and certain other pass-through entities. The 180-day reinvestment period generally begins on the date the taxpayer would otherwise recognize the gain for federal income tax purposes.

Federal tax incentives apply nationwide. However, states do not have to conform to federal QOZ treatment, so state tax treatment varies by jurisdiction.

• 180 Days: Investors must invest eligible capital gains within 180 days of recognition.
• December 31, 2026: End of the deferral period for investments made before 2027. Investors must recognize deferred gain in tax year 2026.
• January 1, 2027: Opportunity Zones 2.0 begins. New zone designations and the rolling five-year deferral take effect.
• 5 Years: For investments made in 2027 or later, investors recognize the deferred gain, with a 10% basis step-up (30% for rural funds).
• 10 Years: Investors must hold a QOF investment for at least 10 years to qualify for exclusion of post-investment appreciation.
• December 31, 2047: Last date to elect the 10-year basis step-up for investments made before 2027.
• 30 Years: For investments made in 2027 or later, the appreciation exclusion covers growth through the 30th year.

No. Selling or exchanging an interest in a QOF generally triggers recognition of deferred gain. In other words, the 180-day rule applies only to the initial investment of eligible capital gains.

No. Only gains treated as capital gains for federal income tax purposes are eligible. Gains taxed as ordinary income do not qualify.

Yes. Investors may put any funds into a QOF. However, only eligible capital gains qualify for the Opportunity Zone tax benefits.