Opportunity Zone Enhancements Under H.R. 1

H.R. 1 provides extensions, enhancements, and certainty around Opportunity Zone federal tax provisions

H.R. 1 (formerly the One Big Beautiful Bill Act – OBBBA) was signed into law on July 4, 2025. The bill provides several provisions related to Qualified Opportunity Zones (QOZ) that are critical for investors, entrepreneurs, fund administrators, and real estate developers and operators to be aware of. The original QOZ legislation enacted in the 2017 Tax Cuts and Jobs Act (TCJA) has widely been viewed as successful, and H.R. 1’s enhancements are poised to provide additional benefits and certainty, along with additional requirements for stakeholders to consider.

Rules for pre-2027 Opportunity Zone investments

It is important to note that the H.R. 1 legislation did not change the key parameters of the original Opportunity Zone program. Notably, eligible investments made into a Qualified Opportunity Fund (QOF) prior to December 31, 2026 will still be subject to mandatory gain recognition on December 31, 2026. Investments that were held for five years prior to the recognition date will be eligible for a 5% basis increase, and investments that were held for seven years will be eligible for a 10% basis increase.

It is also important to note that the gain to be recognized in 2026 will be determined by comparing the lesser of the original deferred gain or the current fair market value of the applicable QOF investment. As such, valuation and appraisal considerations will be critical in the coming year, especially for QOF investments that may have declined in value.

QOF investments made prior to December 31, 2026, and that are held for at least ten years, remain eligible for gain exclusion on the appreciation in value between the original investment and the exit or liquidation. Additionally, the previous regulatory guidance on eligible deferred gains, the available 180-day reinvestment periods, eligible opportunity zone property, and the mechanics for making a gain deferral election all remain unchanged.

Key changes to Opportunity Zone investments starting in 2027

The Opportunity Zone enhancements under H.R. 1 mostly are effective for deferred gain investments made on or after January 1, 2027, and are summarized below.

Opportunity Zone designations

In 2026, state governors will begin nominating new Opportunity Zone census tracts subject to approval by the Treasury Secretary. These newly nominated districts will be effective for a ten-year period beginning January 1, 2027. After ten years, a new nomination process will occur. For stakeholders who may have the opportunity to influence the nomination process, H.R. 1 stipulates that eligible census tracts must fall within a strict range of median family income or poverty rates, and tracts will no longer qualify solely by being contiguous to tracts are designated as low-income. The acquisition date of qualifying Opportunity Zone property will also be reset with each cycle.

Changes to Opportunity Zone tax benefits

For investments beginning in 2027, the tax benefits tied to Opportunity Zone investments have been modified as follows:

• Tax deferral and basis adjustment: H.R. 1 changes the mandatory deferred gain recognition regime from a static date to a rolling five-year deferral. For all QOF investors, capital gains deferred into a QOF will be required to be recognized on the five-year anniversary of that investor’s specific investment date. Additionally, investors will receive a uniform basis adjustment equal to 10% of their deferred gain after holding for five years. As such, investors’ mandatory deferred gain recognition after five years will equal 90% of the original investment assuming the investment hasn’t declined in value. The rolling deferral period will be important for QOF investors to track and places a measure of responsibility at the QOF level on liquidity planning for investors’ tax liabilities.
• Gain exclusion: The ten-year gain exclusion has been preserved. For QOF investors that hold their investments for ten years or longer, any appreciation in the QOF investment between the initial investment and the final exit or liquidation will remain tax-free. H.R. 1 has however instituted a rolling thirty-year cap on the exclusion. Once a QOF investor has held an investment for thirty years, the basis in that investment will automatically be stepped up to current fair market value. This effectively locks in the gain exclusion at the thirty-year mark, and as such any gain attributable to an increase in value beyond thirty years will be taxable.
• Enhancements for rural districts: H.R. 1 created a new fund category for rural census tracts, Qualified Rural Opportunity Funds (QROF). For a census tract to be designated as a QROF, it must meet the low-income criteria for all QOFs and must be entirely a rural area, defined as any area other than a city or town with a population greater than 50,000 or any urbanized area adjacent to a city or town with a population greater than 50,000. For taxpayers holding eligible QROF investments, the five-year basis adjustment noted above is increased from 10% to 30% and the requirement for acquired property to be substantially improved is reduced from 100% of acquisition value 50%.

Additional reporting requirements on QOF and QOZB

Much of the scrutiny around the Opportunity Zone program has been centered around a lack of visibility or transparency on economic benefits that the incentive has provided. H.R. 1 has enacted a framework to begin capturing this data, subject to significant penalties for noncompliance. H.R. 1 will require QOF and QOZB entities to provide data to the IRS on the value of a QOF’s total assets, applicable census tracts where a QOF has invested or a QOZB operates, number of residential units owned by a QOF or QOZB, number of full-time employees of a QOF or QOZB, and the value of tangible property owned or leased by a QOF and QOZB. Investor-level tracking of QOF investments also remains in effect. Further guidance on reporting mechanics is expected and is likely that all QOF and QOZB taxpayers will be subject to significantly expanded tax return disclosures, so this will be an area for all Opportunity Zone stakeholders to monitor.

Maximize Opportunity Zone benefits

H.R. 1 has made Opportunity Zones a permanent part of the tax landscape. As with any legislation, additional guidance from Treasury is expected, particularly with respect to transition, administrative, and reporting matters. While the tax incentives associated with Opportunity Zones are powerful, stakeholders will need to remain diligent when evaluating the inherent risks, reporting requirements, and overall deal structure associated with Opportunity Zone investments. As such, coordination among taxpayers’ advisor teams remains critical to ensure Opportunity Zone tax benefits are fully considered in the context of overall investment and financial strategy.

Please contact your Keiter Opportunity Advisor to learn more about Qualified Opportunity Zone tax incentives and related reporting requirements. Contact us: Email | 804.747.0000