What is the Qualified Opportunity Zone (QOZ) Program?

The Tax Cuts and Jobs Act of 2017 (TCJA) created the QOZ program. Although the TCJA was passed strictly along partisan lines, the QOZ program was originally conceived under the Obama administration, and the concept was surprisingly bipartisan. The fundamental goal of the QOZ program was to stimulate private investment in underserved census tracts throughout the United States. 

To be eligible for the tax benefit, a taxpayer must elect into the program by reinvesting capital gains from the sale of an asset to an unrelated person; unlike Section 1031 exchanges, which function somewhat similarly, the QOZ program allows reinvestment of capital gains regardless of the nature of the asset sold. The destination of the reinvested capital must be a Qualified Opportunity Fund (QOF), which is any tax corporation or tax partnership making an election to self-certify with the IRS. The election to participate in the QOZ program defers the reinvested capital gain and allows taxpayers to qualify for the program’s major tax benefit: a completely tax-free exit after achieving a ten-year holding period for the taxpayer’s QOF interest. The exit not only wipes out built-in capital gains, but it also gets taxpayers off the hook for painful consequences like depreciation recapture. One early misconception about the program’s mechanics was that the deferred capital gain would eventually be eliminated as well, but that wasn’t true: the program requires recognition of the deferred capital gain by December 31, 2026 (or earlier if a so-called “inclusion event” occurs). 

The QOZ program offers two broad choices about how to deploy a QOF’s capital in a tax-compliant fashion. Though QOFs will almost always open operating subsidiaries called Qualified Opportunity Zone Businesses (QOZBs), those QOZBs will invest in real estate, operating businesses, or both. In each case, the QOZB cannot buy an existing business or completed parcel that is already in the zone. Instead, for operating businesses, the QOZB must either (1) start a brand new business or (2) relocate a business from outside the zone to inside the zone (there is a more advanced approach to allow an existing business to completely “wash out” its tangible personal property that is usable in exactly the right circumstances, though). For real estate, the QOZB must either (1) gut renovate an existing property or (2) engage in brand new development, whether that’s ground-up construction or significantly expanding a structure.   

If taxpayers deferring capital gains into QOFs don’t want to undergo the hassle of supervising their own project within a zone, taxpayers can invest into existing QOFs, whether closely held or more widely syndicated. Major institutional players have started QOFs to invest in a variety of geographical areas and asset classes throughout the United States, and the sponsors of those funds handle the investment of the capital and fund-level tax compliance, making the experience smooth for taxpayers who are only interested in the tax incentives and not the day-to-day operation of an enterprise within a QOZ. 

The OBBBA Makes Positive Changes to the QOZ Program 

Permanence of OZ Program

The original iteration of the QOZ program within the TCJA ended the program after roughly ten years. The deadline to invest capital into a QOF occurred in June 2027, and while investments did not need to be liquidated after that capital investment deadline, the IRS did set forth an outside date of December 31, 2047 to achieve the ultimate tax-free exit. Now, the OBBBA has permanently extended the QOZ program and eliminated sunset provisions within the TCJA. The new legislation provides for additional low-income communities to be designated on a rolling, ten-year basis, beginning January 1, 2027. The new legislation provides the timing cliff (that is, the December 31, 2026 final date for deferred gain recognition) has been replaced by a five-year deferral period for investments after December 31, 2026, so the tax deferral always amounts to five years regardless of the specific start date.  

While the OBBBA gave the QOZ program a permanent extension and should breathe new life into investor interest, the new legislation does not change the treatment of investments made under the existing program, which expires in June 2027. We explain below how this creates a kind of “dead zone” where taxpayers will eagerly await the redesignation of QOZs and the effective date of the revised rules during the 18-month interim period between the passage of OBBBA and the official launch of the program’s new era. 

Designations and Determinations of Qualified Opportunity Zones 

The OBBBA has redefined “low-income communities” for the QOZ program’s purposes and the rules for the governors of the various states and territories to designate the QOZs when January 1, 2027 arrives. The new legislation lowers the required Median Family Income (MFI) of such communities from 80% to 70% of the statewide average. OBBBA also removed the designation exception for land contiguous to low-income communities and the auto-designation of low-income census tracts in Puerto Rico. 

The Program’s Rules Largely Stay the Same

We have detailed below the changes the OBBBA made to the reporting regime for the QOZ program, but the “guts” of the tax compliance have remained almost untouched under OBBBA. Although we explain above the general ways a QOF can deploy capital in compliant fashion, the specifics of the statutes and regulations governing QOF investment and operations will look very familiar to taxpayers who might have invested through the QOZ program under the old regime. For instance, the “substantial improvement” and “original use” requirements for tangible personal property remain; so, too, do the strictures around intangibles; the program still requires “substantially all” of a QOZB’s operations to occur within a QOZ; and “sin businesses” are still excluded. Although legislation proposed by both parties between 2017 and 2025 sought to modernize and streamline unwieldy and almost nonsensical portions of the QOZ compliance regime, none of those proposals appear to have influenced the final text of the OBBBA. As a prominent example, a prior draft bill allowed a “fund of funds” structure in which QOFs could invest in other QOFs without penalty, but the OBBBA still preserves the prohibition of QOFs investing in QOFs. 

Introduction of Qualified Rural Opportunity Funds

The OBBBA created the new concept of Qualified Rural Opportunity Funds (QROFs), which come with special incentives when capital is deployed in areas outside of municipalities with a population of 50,000 or more (and their contiguous census tracts). Compared to investments in normal QOFs, which receive a 10% step-up basis after a five-year holding period (thereby providing a “discount” of 10% off the deferred capital gain a taxpayer must recognize after five years), investments in QROFs enjoy a 30% increase instead. The same tax-free exit applies for both QOFs and QROFs after ten years. 

QROFs also modify the “substantial improvement” requirement for existing property within a rural QOZ. Instead of the “double your basis” rule applying, which requires investment of at least as much new capital as the tax basis of the current structure, QROFs cut that requirement in half. This makes the acquisition and renovation of real estate easier, and for refurbishment of other tangible property – such as vehicles, farming equipment, or agricultural infrastructure – to become a more viable strategy. 

Reporting Requirements and Penalties

The OBBBA has introduced new Code Sections – 6309K, 6309L, and 6726 – which govern reporting requirements for QOZ entities and the penalties for failing to comply. These statutes provide that entities must report their own tax and legal vitals, details about the property they own, and the investors holding interests. New Code Section 6726 provides rules penalizing any person for failure to meet the reporting requirements by the necessary date provided by the Secretary of State. The penalty shall be $500 for each day the failure continues, not exceeding $10,000 (with a quintupling for intentional disregard) for any one return. 

The reporting requirements are attached below for those interested in the finer details. 

Forthcoming Regulations

The IRS has a less Herculean task before it than the one they faced after the original passage of the QOZ program. In 2017, the TCJA contained a poorly drafted statute that probably did not go through many rounds of proofreading or revision before finalization based on the desire to pass the bill prior to 2018. The IRS had to confront a bevy of thorny technical questions and reconcile the new statute with a mountain of others, including the partnership tax rules, the corporate tax rules, and the consolidated return rules. 

Since the core compliance provisions of the QOZ program remain basically unchanged after OBBBA, the IRS will primarily answer questions about bridging the old program and the new one when it promulgates the newest round of regulations under Section 1400Z-2. For instance, can a QOF remain an open-end fund and maintain its investments under the old regime but accept capital to deploy investments under the new one? If a zone gets re-designated on the 2027 map and a QOF continues, how will it handle reporting to its investors and to Treasury if it continues accepting investments under the OBBBA rules? Look for the IRS to solicit comments in late 2025, propose regulations in early 2026, and finalize them by the end of 2026’s third quarter. 

What This Means for You As Our Clients:

Before President Trump’s re-election, prospects for the QOZ program seemed grim. Even bipartisan legislation introduced to streamline the program and make the compliance regime more sensible received little to no attention from Congress at large, and complaints poured in from politicians on both the left and the right. To the left, the QOZ program did not adequately solve the economic issues within the zones and served as too large a tax benefit to the wealthy; to the right, the program neglected districts that leaned heavily toward Republicans in local and national elections, perhaps in favor of more centrist or left-leaning districts.  

When the OBBBA was still struggling for its own viability, the QOZ program’s extension could have easily fallen by the wayside as Congress scrounged for enough revenue raisers (or avoided enough extra spending) to satisfy the GOP’s own fiscal hawks and make the Congressional Budget Office’s scoring look better. Instead, the program’s champions within the Senate pulled off a major coup: they bucked the text in the House’s version of the bill and made the program permanent, with a rolling redesignation of zones every ten years. 

After a burst of activity in the QOZ space between mid-2018 and the onset of the COVID-19 pandemic, investment in QOFs plateaued to a steadier pace between mid-2020 and the passage of OBBBA. Now that the program is enshrined permanently into law, taxpayers can expect a surge of renewed interest, meaning more funds ought to be available to deploy into projects across the country. Although the new QOZ map will not be minted until January 1, 2027, the stock market is pushing new all-time highs on an almost daily basis in July 2025, meaning that taxpayers looking to harvest gains can find a warm, dry shelter for those gains through deferral into QOFs. 

Taxpayers will naturally ask what to do during the interim period between the old regime’s expiration and the new regime taking root, a span of about 18 months. Our inclination is that taxpayers should consider finding QOFs both large and small that are desirous of new capital between now and the late June 2027 deadline to invest under the old rules. We feel this might be the best play for that interim period because the normal risks of investing in QOZs are significantly lower when a taxpayer deploys capital into QOFs with completed and operational businesses and real estate. Large QOFs with institutional sponsors should prove especially attractive because the real estate development those funds began in the early days of the original program ought to be complete, and taxpayers can perform due diligence on cash-flowing structures. Even though we use what appears to be an emerging colloquial term – the “dead zone” — to describe the interim period in our simplified timeline below, savvy investors can take advantage of the transition to minimize risk and find bespoke angles. 

When the original QOZ program launched, the actors in each of the states and territories responsible for designating the specific zones seemed unprepared for the monumental task at hand. Some intrepid reporters in the mainstream media highlighted deficiencies and alleged improprieties in the selection process. But we’re confident that the newest selection process will see a more prepared group of decision-makers intent on steering a significant amount of capital into areas that sorely need the increased investment. When January 1, 2027 rolls around, we anticipate the program’s official rebirth will unleash a torrent of additional cash into QOFs around the country, and we hope that investment will be spread more evenly; critics of the QOZ program reported that most of the capital went to a small percentage of zones that arguably needed the economic boost less than others. The original QOZ program saw zones designated in mid-2018 based on numbers from the 2010 United States census; that discrepancy led to certain zones qualifying that probably shouldn’t have been eligible. This time, the hope is that the zones are being designated using higher-quality data and more stringent criteria, which will lead to a map more in line with the spirit of the program. 

We lament the OBBBA excluding any significant language clarifying and streamlining the mechanics of investing through QOFs, which means the same unwieldy legal guidelines will govern the program into the future. But our firm has become increasingly familiar with the proper legal structuring and potential pitfalls the current compliance regime might pose for investors, and we remain ready to navigate those as the permanent version of the program gets underway. 

The January 1, 2027 transition should hinge far less on the timely issuance of IRS regulations than the original launch of the QOZ program. Even so, expect new IRS Commissioner Billy Long to pressure his charges to prioritize promulgation of the newest round of regulations under Section 1400Z-2 to avoid a lag in deployment of capital into QOFs, which is what happened in 2018. When the Service proposes its regulations, which we believe will occur in late 2025, we expect to comment on those regulations as we did in the past; when we do, we will share our comment letter through our mailing list. 

Click Here for Reporting Requirements

DISCLAIMER: This summary is not legal or tax advice and does not create any attorney-client relationship. This summary does not provide a definitive legal opinion for any factual situation. Before the firm can provide legal advice or opinion to any person or entity, the specific facts at issue must be reviewed by the firm. Before an attorney-client relationship is formed, the firm must have a signed engagement letter with a client setting forth the Firm’s scope and terms of representation. The information contained herein is based upon the law at the time of publication.