Opportunity Zones 2.0: How the One Big Beautiful Bill Act Refines and Regulates Community Investment

In 2017, the Tax Cuts and Jobs Act (“Act”) created the notion of an Opportunity Zone (“OZ”) to encourage private investment into economically disadvantaged communities. (Blake Christian, Holthouse). The goal of an OZ is to stimulate economic growth and job creation by offering tax incentives for investors in these communities. Id. Under the Act, a company that realizes a capital gain can reinvest the money in a Qualified Opportunity Fund (“QOF”) to defer capital gains taxes. (Nancy Anderson, Holland & Knight). Investments held for five to seven years before 2026 could reduce taxable capital gains by up to 15%. Id. Originally, OZs were intended to end in 2026, but the One Big Beautiful Bill Act (“OBBBA”) makes the program permanent while refining the rules to better target truly disadvantaged areas. Id. This post seeks to understand how the OBBBA reshapes OZs by narrowing eligibility to target the most disadvantaged tracts, introducing Qualified Rural Opportunity Funds (“QROFs”) with enhanced incentives, establishing a ten-year re-evaluation process to ensure designations remain accurate, and imposing stricter compliance measures to prevent abuse and promote genuine community investment.

The OBBBA narrowed the criteria for OZ eligibility, severely impacting economically disadvantaged communities. (Jason Watkins, Novogradac). Before the passing of the OBBBA, OZs were limited to areas that met one of the following criteria: (1) a poverty rate at or above 20%, (2) a median household income that was 80% or less than the statewide median for rural tracts, or (3) a median household income that was 80% or less than the metropolitan area median for urban tracts. Id. The OBBBA defines a tract as low-income if its median household income is at or below 70% of the statewide median for rural areas and at or below 70% of the urban median in urban areas. Id. In addition, tracts with a poverty level at or above 20% now must have a median family income no greater than 125% of the relevant state or metropolitan median. Id. The Economic Innovation Group, the creator of the concept of OZs, finds that the passage of the OBBBA will cause the number of OZs to see a “19.5 percent reduction in the number of OZ designations in the upcoming round, dropping from 7,826 to 6,304.” (John Lettieri, Economic Innovation Group). While the exact number of people within these now-ineligible tracts is challenging to determine, it likely reaches into the tens of thousands. These individuals, who continue to reside in statistically impoverished areas, will no longer benefit from outside investment and job creation, stimulated by the OZ status. Id. While the narrowed criteria removes certain tracts from investment, Congress sought to bridge the gap by creating a new type of fund.

The OBBBA introduced a new type of QOF called a QROF. (Brian Dethrow, Jackson Walker).  A QROF is an OZ that invests at least 90% of its assets in areas outside cities or towns with populations over 50,000, excluding those adjacent to such cities. Id. The tax incentives for investing in a QROF are significantly more favorable than investing in a traditional QOF, including a 30% basis step-up after holding for five years, compared to the usual 10% for a standard QOF. Id. Unlike traditional QOFs, which require investors to reinvest 100% of the property's value in improvements, QROFs only require reinvesting 50% of the property's value to qualify for the same tax incentives. Id. These higher incentives aim to encourage investors to invest in communities that have historically had limited access to outside capital. (Center on Rural Innovation, East Cascade Works) The Center on Rural Innovation states that, “despite making up 12% of all U.S. businesses, rural businesses receive less than 1% of venture capital funding.” Id. After years of underinvestment in rural communities, QROFs, with more attractive incentives relative to traditional QOFs, seek to drive capital into these areas. It remains to be seen whether these new incentives will successfully draw investments to rural communities.

The OBBBA seeks to make OZs permanent while enforcing new compliance regulations and penalties to curb abuses. (Jenny H. Connors, Williams Mullen). Prior to the OBBBA, the lax regulatory environment allowed many investors to exploit tax loopholes, benefiting themselves at the expense of the communities the OZs were intended to support. (Hayley Roth, The Georgetown Journal of Legal Ethics). One such example comes from Michigan, where it was found that a “wealthy area of Detroit was designated as a LIC [Low-income community] despite not meeting any of the eligibility criteria. Uncovered documents point to a lobbying effort by the billionaire founder of Quicken Loans, Dan Gilbert, who (not coincidentally) owns a significant amount of property in the area. The mis-designation potentially allows Gilbert to capture enormous tax advantages intended by Congress to support struggling regions, not a wealthy CEO.” (Robert Orr, Niskanen Center).  To address such abuses, each OZ tract will now be re-evaluated every ten years using current economic data to determine its future eligibility. (Sharon Kreider, Western CPE).

In addition to these reviews, the OBBBA introduces comprehensive, annual reports under Internal Revenue Code §§6039K and 6039L, requiring OZs to disclose information including total assets, property values, amount invested into each Qualified Opportunity Zone Business, number of employees, and reports on investor disposition. (Michael Lobie, Seyfarth).  Failure to meet these new requirements can result in penalties up to $10,000 per return, or up to $50,000 for QOFs with over $10,000,000 in assets, with harsher penalties for willful noncompliance. Id. The stricter reporting requirements seek to prevent abuse of the system and ensure that funds are being invested properly rather than used by investors merely to obtain a tax break. (Robert Orr, Niskanen Center).  To address such abuses, each OZ tract will now be re-evaluated every ten years using current economic data to determine its future eligibility. (Sharon Kreider, Western CPE). These ten-year reviews ensure that only economically disadvantaged communities remain eligible, so more investment can be directed into communities that truly need it. (John Lettieri, Economic Innovation Group).

Overall, the OBBBA has been met with cautious optimism from investors and developers. With the permanence of OZs established, institutional investors, including leading Wall Street firms, can move beyond concerns about the program’s original 2026 expiration and pursue long-term investment strategies. (Brad Hickey, Lexology). In addition to offering a more secure investment future, QROFs provide extra incentives that attract investors, while also supporting rural tracts that have faced greater challenges than urban tracts in securing capital. (Steven Hadjilogiou, McDermott Will & Emery). There is optimism that the program will become more finely tuned to help truly impoverished communities. (Gregory Heller, Guidehouse). Before the OBBBA, certain tracts “attract[ed] more investment in areas with higher preexisting private investment, often located in prosperous counties and high-growth regions.” Id. By narrowing the criteria for OZ designation, creating the QROF, implementing 10-year eligibility checks, and introducing new reporting, the OBBBA aims to ensure that funding is directed to where it is truly needed, rather than where investors believe they can generate the most profit. Ultimately, the OBBBA hopes to strengthen the Opportunity Zone framework by directing capital to the communities that need it most.