Written by Bethany Webre, Accountant
The One Big Beautiful Bill Act introduced several tax law changes since the Tax Cuts and Jobs Act (TCJA) of 2017. One of these changes is the adjustments made to the qualifications for and benefits of investment in Qualified Opportunity Zones (QOZs). While the TCJA produced a temporary tax incentive, Section 70421 of the OBBBA amends the Internal Revenue Code to permanently extend and modify incentives for this type of investment.
Opportunity Zones, established in the TCJA, allow investors to defer and potentially reduce capital gains taxes by reinvesting those gains into Qualified Opportunity Funds (QOFs). Previously, the requirement for substantial improvement was 100%; the OBBBA lowers this threshold to 50%. For example, if the property cost $100,000, at least $50,000 would need to be spent on the improvement of the property. Compliance is heavily emphasized as it relates to the eligibility and reporting of QOFs. One such requirement is that the fund must be set up as a partnership or corporation and file a tax return as such. The fund must be set up for the sole purpose of investing in QOZ property. The date of investment and holding period of the investment must be within specified time frames, and 90% of the fund’s assets must be in a QOZ, to name a few other specifications. (Source: https://www.irs.gov/newsroom/treasury-irs-provide-guidance-for-opportunity-zone-investments-in-rural-areas-under-the-one-big-beautiful-bill)
What does this mean for you? There are currently about 7,000 QOZs in the U.S. (a decrease from the previous 8,764 in the TCJA), many of which have lacked investment for years. A list of all current QOZs can be found on the IRS website. Note that new zone designations will be in place January 1, 2027. QOF investments held for 5, 7, or 10 years have different rates of deferred capital gains tax. Once the investment is sold, the taxpayer receives either a 10 or 30% step-up in basis to fair-market value (depending on the specific Opportunity Zone) at the date of sale or exchange if the investment is held for more than 10 years and was substantially improved (50%). (Source: https://www.hud.gov/opportunity-zones/investors)
If you are interested in making a difference and investing in an Opportunity Zone, consult with your tax advisor. Qualification and reporting compliance is stressed with regards to QOZ investments, so it is important that your investment meets all requirements and is reported according to IRS provisions. Make sure the property, zone, and funds meet the requirements. Most importantly, invest in a way that brings real, lasting value to a community in need.
Tax law is always changing, and it is critical to stay informed. Thank you for trusting Darnall, Sikes & Frederick to be your financial and tax experts. Please reach out with any questions or concerns.
References
https://www.irs.gov/credits-deductions/businesses/opportunity-zones
https://www.irs.gov/credits-deductions/businesses/certify-and-maintain-a-qualified-opportunity-fund
https://www.hud.gov/opportunity-zones/investors