The Qualified Opportunity Zone program - by Michael Packman

There has been a lot of talk around the changes brought on by the Big Beautiful Bill Act. I am regularly fielding questions on what they are, especially in relation to real estate, so I decided to outline the changes in one area, the Qualified Opportunity Zone (QOZ) program, in this article.

The OBBBA Effect:
Key Changes to Qualified Opportunity Zones

The QOZ program, initially established by the 2017 Tax Cuts and Jobs Act (TCJA), underwent a profound transformation with the enactment of the One Big Beautiful Bill Act (OBBBA) on July 4, 2025.

The OBBBA amendments, which primarily govern investments made on or after January 1, 2027, create a permanent, two-tiered incentive system designed for long-term real estate and business development. Here are the most crucial changes investors and fund managers need to understand, contrasting the new rules with the original TCJA framework.

1. Program Permanence and Dynamic Zone Designation

The fixed sunset date for the QOZ program is eliminated. The program is now a permanent fixture in the U.S. tax code, which provides stability for long-term capital planning.

• New Rule: QOZ designations are no longer permanent. Governors must now propose new QOZ designations every 10 years, beginning in 2026. This means investors must monitor the zone status of their assets over time.

• Stricter Eligibility: The criteria for designating low-income communities as QOZs have been tightened, reducing the median family income threshold from 80% to 70% of the applicable median income. This change is expected to reduce the total number of eligible tracts nationwide.

2. Rolling Deferral Period (Post-2026 Investments)

The previous program required all deferred capital gains to be recognized on December 31, 2026, regardless of the investment date. The OBBBA replaces this fixed deadline with a flexible rolling schedule.

• New Rule: Capital gains invested in a Qualified Opportunity Fund (QOF) are now deferred for a rolling five-year period from the date of the investment. This provides future investors with a clear, manageable inclusion timeline tied directly to their contribution date.

3. Simplified Basis Step-Up

The mechanism for reducing the tax owed on the original deferred gain has been simplified.

• New Rule: The benefit is a single 10% basis step-up for QOF investments held for at least five years.

• Change: The original additional 5% step-up granted for a seven-year hold (totaling 15%) has been eliminated.

4. Introducing Qualified Rural Opportunity Funds (QROFs)

A major initiative to drive capital into truly underserved non-urban areas, QROFs operate similarly to QOFs but with enhanced incentives for rural projects.

• Enhanced Step-Up: QROF investors receive a significant 30% basis step-up (compared to 10% for standard QOFs) after holding the investment for five years.

• Reduced Improvement Requirement: The demanding “substantial improvement” requirement for existing property, which typically required investing 100% of the property’s adjusted basis in improvements, is reduced to 50% for QROF property. This substantially lowers the barrier to entry for rehabilitating rural assets.

5. Mandatory 30-Year Gain Recognition Cap

While the 10-year holding period still grants permanent federal tax exclusion on post-acquisition gains, the OBBBA introduced a crucial limit on this benefit.

• New Rule: For investments held longer than 30 years, the tax-free exclusion is capped. The investor’s tax basis in the QOF interest is automatically stepped up to the Fair Market Value (FMV) on the 30^th anniversary of the investment. Any appreciation that occurs after this 30-year mark will be subject to capital gains tax upon a subsequent disposition.

6. Increased Reporting and Compliance

To enhance transparency and ensure community impact, the OBBBA imposes new and stringent requirements.

• New Rule: QOFs must now file comprehensive annual returns detailing asset values, job creation metrics, property descriptions, and investment locations. Failure to comply can result in substantial penalties, underscoring the necessity for meticulous fund management and detailed reporting to the IRS.

Strategic Considerations for Investors

The QOZ program remains a compelling vehicle for tax-advantaged real estate development. The amendments under the OBBBA create a two-tiered system:

1. Current (Pre-2027) Investments: Investments made before the end of 2026 are still subject to the original TCJA rules, meaning the tax on the original deferred gain must be paid by the end of 2026. However, the 10-year tax-free gain exclusion remains valid and is the primary driver for these investments.

2. Future (Post-2026) Investments: The new rules offer greater flexibility with the rolling five-year deferral and enhanced incentives for rural development, making QROFs a particularly attractive option. The program’s permanence also removes the uncertainty that previously plagued long-term capital planning.

Real estate investors must work closely with their tax and legal advisors to understand how the new rolling deferral periods, simplified step-up rules, and the emergence of QROFs fit into their overall investment strategy, especially as the current program era sunsets at the end of 2026.

Michael Packman is founder and CEO of Keystone National Properties (KNPRE), New York, N.Y.