OZ LEGISLATION TRACKING

On July 3, 2025, the U.S. House of Representatives narrowly passed H.R. 1, the One Big Beautiful Bill, by a vote of 218–214, officially making the Opportunity Zone program permanent. Notably, all OZ 2.0 provisions were preserved in the final version.

Key OZ 2.0 Provisions Included In H.R. 1:

• Permanent status. Opportunity Zone policy is no longer sunset-dated. It will become a standing component of the Internal Revenue Code.

• Rolling five-year gain deferral. Any qualifying gain invested into an OZ fund after December 31, 2026 receives a five-year deferral.

• New basis step-up schedule. Standard Qualified Opportunity Fund (QOF) investors receive a 10 percent basis step-up after five years; Qualified Rural Opportunity Fund (QROF) investors receive 30 percent.

• Additional rural incentives. Rural OZ tracts (defined as areas outside cities or towns of 50,000 people or contiguous urbanized areas) also enjoy a lower 50 percent substantial-improvement threshold, versus the usual 100 percent.

• Zone re-designations every decade. Governors must select new zones every 10 years starting July 1, 2026. New zones will go into effect every 10 years starting January 1, 2027.

• Tighter census tract criteria. The “low-income community” threshold falls from 80 percent to 70 percent of area or statewide median family income, and the non-low-income contiguous tract exception disappears. Also of note, the special rule for Puerto Rico is stricken from the statute. The island loses its blanket designation, and now may only select up to 25 percent of eligible tracts, just like all other states.

• Expanded reporting. Transparency measures, written to satisfy Byrd-rule tests, kick in for tax years beginning in 2027.

On June 28, 2025, the Senate released an updated draft of the 2025 tax bill (pgs. 426-456) featuring newly revised proposals to reform the Opportunity Zone program:

Key Highlights:

• Permanent Structure: The program would shift to a recurring 10-year designation cycle. Newly certified census tracts would take effect on July 1, 2026, with investments allowed starting January 1, 2027.
• Revised Basis Adjustment: Investors who hold Qualified Opportunity Fund (QOF) investments for at least five years would receive a 10% step-up in basis on deferred gains. For those investing in Qualified Rural Opportunity Funds, the basis increase would be 30%.
• End of Deferral Period: For capital gains invested after December 31, 2026, the deferred gain must be recognized at the earlier of either the investment’s sale or December 31, 2033. Additionally, a new 10-year recognition window would begin for each tranche of investment.
• Modified Substantial Improvement Rule: For rural opportunity funds, a property would be considered substantially improved if the investment equals or exceeds 50% of its original cost basis—down from the current 100% threshold.
• Stricter Eligibility Criteria: To qualify, tracts must now have a median family income below 70% of the area’s average, a drop from the previous 80%. Eligibility for contiguous tracts would be eliminated, and Puerto Rico’s authority to designate OZs would sunset at the end of 2026.

Download the Bill here