Qualified Opportunity Zones under OBBBA

This article will summarize the Qualified Opportunity Fund tax rules under old law and the changes made under the One Big Beautiful Bill of 2025 (OBBBA).  It will also discuss the new rules for rural areas, and how these may be helpful to cooperatives.  With the changes that were made in OBBBA, it may be worthwhile for cooperatives and their advisors to look more closely at these rules if the cooperative has a significant short- or long-term capital gain or is seeking to foster development in its rural community. 

Qualified Opportunity Zones (QOZ) and Qualified Opportunity Funds (QOF) came into the tax law in 2017 under the Tax Cuts and Jobs Act (TCJA).  See, Code Sec. 1400Z-1 and 1400Z-2.  The law is intended to encourage investment in “low-income communities” through long-term tax incentives for investors.

As originally enacted, the program had a limited life.  It was scheduled to end December 31, 2026, for new investments.  OBBBA did not extend the old TCJA program, but rather created a new program for investments beginning January 1, 2027.  As described below, OBBBA also made a minor tweak to the rules under the TCJA program.    

The new law has several important provisions:

• The new program is permanent.
• It provides for designating a new set of QOZs. It then provides for redesignating QOZs every ten years thereafter.
• To better target the incentive, the new program narrows the definition of “low-income community” (LIC) to census tracts that have a poverty rate of at least 20% or a median family income that does not exceed 70% of the area median income. Additionally, a "low-income community" cannot include any census tract where the median family income is 125% or greater of the area median family income.
• It eliminates the ability to designate tracts that are contiguous to LICs as QOZs. Under the TCJA, such tracts could qualify even if they would not otherwise qualify as LICs.
• It provides for a special category of QOZs in rural areas (rural QOZs) with two extra incentives.
• As more particularly described below, the incentives for investors generally remain the same as under the TCJA – (i) several year deferral of capital gains invested in QOFs, (ii) reduced recognition (90% in the case of regular QOFs and 70% in the case of rural QOFs) of the deferred gain if the investment in the QOF is held for five years, and (iii) no tax on appreciation in the value of the investment in the QOF if held for ten years.
• Reporting requirements and penalties were added.

Read more of this article at Connect