Opportunity Zones Reimagined: A New Chapter for Real Estate Investors and High-Net-Worth Individuals

The One Big Beautiful Bill Act (“OBBBA” or the “Act”) marks a significant reboot of the Opportunity Zone (OZ) program, with new rules set to take effect on January 1, 2027. For real estate developers, fund sponsors and high-net-worth individuals seeking tax-advantaged investment opportunities, this legislative update offers a compelling second chance to capitalize on OZ incentives.

Originally introduced in 2017 to spur investment in economically distressed areas, the OZ program has been revamped to enhance its appeal—particularly for those investing in rural markets and long-term real estate projects. This client alert outlines the key changes, including expanded tax benefits, updated compliance requirements and new structuring considerations for Qualified Opportunity Funds (QOFs).

Whether you are evaluating a development pipeline or planning for future capital gains, understanding the new OZ landscape is essential for unlocking its full potential.

Tax Benefits

Opportunity Zone tax incentives were first introduced as part of the Tax Cuts and Jobs Act of 2017 with the intention of encouraging taxpayers to sell appreciated assets and reinvesting the resulting gains into economically distressed areas. For that reason, the threshold to investing in an OZ is the realization of a capital gain. For taxpayers who have realized a capital gain in 2027 or a later year, they can achieve three Federal income tax benefits by investing the amount of the realized gain in a Qualified Opportunity Fund (defined below) within 180 days from realizing the gain:

• If the taxpayer maintains the investment for five years, the basis of the investment will increase by an amount equal to 10% of the deferred gain invested in the QOF (or 30% of the deferred gain if the investment is in a Qualified Opportunity Fund which invests in Rural Areas (defined below)).
• The Federal capital gains taxes on the reinvested capital will be deferred for five years (or until the Qualified Opportunity Fund investment is sold). However, the basis increase described above may be used to eliminate a portion of the gain.
• After a ten-year holding period, the taxpayer can sell the investment free from Federal income tax.

The Requirements

The first step is to realize a capital gain from the sale of an asset to an unrelated third party and reinvesting the capital gains in a Qualified Opportunity Fund (or a “QOF”). Unlike a Section 1031 exchange, the entire proceeds of the sale need not be reinvested; rather, only the portion of the sales proceeds which represents capital gain need be invested in the QOF. For example, if a taxpayer were to sell a $10M asset which had tax basis of $6M resulting in a $4M gain, only $4M must be reinvested to avoid the immediate recognition of gain.

A QOF is typically a tax partnership (e.g., LLC) which self-certifies as a QOF and invests in certain OZ property. 90% of the QOF’s assets must be OZ property. Each U.S. state will identify and designate census tracts which qualify as Opportunity Zones. These designations will be made every 10 years and apply to investments made through the next subsequent designation date. Property must be located in the designated OZ to qualify as OZ Property.

The QOF must test its assets semi-annually and use the average of the two testing periods to determine whether it satisfies the 90% OZ Property threshold for the year in question. OZ Property can either be (i) tangible business property located in an Opportunity Zone that is either “Original Use” property or “Substantially Improved” property; or (ii) equity in an OZ Business Entity (see below). In order to satisfy the Original Use test, the tangible property must (i) be new construction, (ii) have been vacant for the past five years or (iii) never previously used in the Opportunity Zone.

Tangible property will satisfy the Substantial Improvement test if the QOF spends an amount equal to the adjusted basis of such property on improvements, rehabilitation or construction to the property within a 30-month period. However, if the property is located in a Rural Area, then only an amount equal to 50% of the adjusted basis of the property need be spent on improvements, rehabilitation or construction. Rural Areas are those which are outside, and not directly adjacent to, areas with populations of over 50,000 people.  

In lieu of, or in addition to, investing in tangible property, the QOF may invest in an OZ Business Entity. An OZ Business Entity is a corporation or tax partnership if, amongst other requirements, (i) at least 50% of its total gross income is derived from the active conduct of a trade or business in an Opportunity Zone, (ii) at least 70% of its property is tangible OZ Property, (iii) it doesn’t operate a casino, massage parlor, golf course, country club, hot tub facility, suntan facility, racetrack or other gambling facility, or any store the principal business of which is the sale of alcoholic beverages for off-site consumption, and (iv) no more than 5% of its property is non-qualified financial property.

Finally, QOFs be required to report certain information to the Internal Revenue Service each year, including: the census tracts the QOF invests in, NAICS codes that apply to its businesses, the number of residential units owned, the approximate number of full-time employees it employs, and more. Failure to comply with these information reporting requirements could result in significant penalties. Note that existing QOFs are now subject to these reporting requirements.