The “One Big Beautiful Bill” puts a lot of faith in a revamped and now permanent Opportunity Zone program to revitalize low-income areas of the U.S. Whether OZs 2.0 can deliver the desired results remains to be seen.
“We know that OZs have financed and continue to finance hundreds of thousands of new housing units in designated communities, and we anticipate that trend will continue now that the policy is a permanent feature of the Tax Code,” said Catherine Lyons, director of policy and coalitions at Economic Innovation Group, which conducted an analysis of the bill’s changes to OZ investments.
OZs, a product of the 2017 Tax Cuts and Jobs Act, have spurred more than $100 billion in capital investment in 7,800 Census tracts across 47 large cities since inception, most of it going into building housing, according to the National Bureau of Economic Research.
Between Q3 2019 and Q3 2024 alone, OZ investors built 313,000 new residential units, according to a study by the Economic Innovation Group, which provided the first quantitative evidence that OZs have significantly increased housing supply in designated communities.
This study, which made use of HUD data sourced from U.S. Postal Service counts of new addresses, also suggests that OZs may be the most effective tool in the federal housing playbook, as it found that this new housing came at the low cost of about $26,000 per new residential address, compared to the $80,000 to $280,000 per unit price tag nationally.
“The findings show that the causal effect of OZs on housing supply is positive, substantial, and has continued to grow through the end of 2024,” noted the report.
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The OBBB does not change anything for current OZ investors. Louis Rogers, founder & co-CEO of Capital Square, a multifamily investor/developer that operates as a Delaware statutory trust, 1031 exchange and REIT, noted that current investments will expire at the end of 2026 but the hold period for exiting the investment without a capital gains tax is still 10 years.
“We think there is a unique opportunity for investors who are experiencing gains in 2025 and 2026 to invest in current, proven OZ census tracts,” Rogers added, noting that while their tax deferral will be limited to one-and-a-half years, they will still enjoy 10 years of tax-free growth. His company is currently fundraising for one of the last OZ developments in Richmond’s fastest-growing residential neighborhood.
So how do these changes affect 2.0 OZ investors? Lyons said it makes the structure of the policy much simpler and more certain for all OZ investors.
Every investor will receive a five-year deferral period, and investments held for those five years will also receive a 10 percent step-up in basis benefit. “We anticipate that this will really smooth out the flow of capital,” she said, “whereas in OZs 1.0, there were certain deadlines where if you invested by 2019 or 2021, that’s when you got some of the step-up in basis benefits.
“That led to ebbs and flows in capital raising and deployment,” Lyons added, noting that these structural changes smooth out the flow of capital over the lifetime of the policy.
Why the OBBB is a gamechanger for OZs
Making the program permanent by establishing the 10-year rolling designation cycle beginning in 2026 is truly significant, observed John Grady, executive director at ADISA, a trade organization for the alternative and direct investments industry. “That’s a fundamental shift, from our perspective, and a game-changer.”
He noted that this change gives sponsors of Qualified Opportunity Funds and the broader investment community the certainty and long-term runway needed to build durable, impactful capital strategies. “To our thinking, these new elements will increase OZ investment,” he added.
This is most notable from a structural standpoint, Lyons said, explaining that it provides a five-year rolling deferral period that’s based on the timing or date of the investment. Previously, investors had until the end of 2026 to realize initial gains. This means that capital gains on your investment in a QOF will be deferred for five years if you reinvest any gains within 180 days of a sale, but if you hold it for at least 10 years, the capital gains tax goes away.
READ ALSO: How Opportunity Zones Progressed Through 2024
Pat Swanson, managing director at Stream Realty Partners, noted that the most important provision for investors is the return of the 10 percent step-up basis, which is key to generating affordable and workforce housing.
“This is good because it brings the Opportunity Zone program back to its original intent and gives investors a more compelling reason to get involved,” he said, noting that it also gives you more time to meet requirements, better tax treatment, and clarity and flexibility around project plainning, financing and exit strategy.
A smaller, more targeted OZ Map
The BBB also changes the geography of eligible OZ designations, which will continue to evolve to reflect current economic trends on the ground, Lyons said. But she noted that eligibility criteria for OZs have tightened significantly and will result in a slightly smaller and more distressed map of communities.
The new OZ legislation continues to provide states with the ability to designate 25 percent of their low-income communities as OZs while reducing the overall number of OZs by 19.5 percent, from 7,800 to just 6,300. Governors can begin new OZ designations on July 1, 2026, and the map will be updated every 10 years.
The bill’s removal of the contiguous tract provision in OZ 1.0, which included tracts adjacent with qualifying ones, Grady noted, will also reduce the total number of tracts. He suggested, however, that updating qualifying data, along with use of rolling 10-year definition periods, helps to ensure that what qualifies as an OZ reflects current income levels.
Rogers warned that this change could backfire. “While we appreciate the intent of that change, if you want to direct investment to neighborhoods that need it most, there is a risk of lower overall investment under the program, because the underlying real estate fundamentals are not strong enough to attract investment, even with the tax incentives,” he remarked.
The bill also expands OZs to rural communities and provides investors in these areas preferential treatment, noted Lyons. Investing in rural OZs triples your step-up benefit to 30 percent. It also lowers the improvement threshold for existing buildings to 50 percent, she said, noting, for example, that if you acquire a building for $1 million in a rural OZ, you must spend $500,000 in capital improvements to be eligible for OZ tax incentives, as opposed to $1 million in urban OZs.
The BBB also lowered the income threshold to qualify as an OZ from 80 percent of median family income to 70 percent, but it retained poverty rate eligibility at 20 percent, said Lyons, noting that a tract can qualify as an OZ based on either MFI or poverty rate.
Additionally, the bill eliminates a special rule for Puerto Rico that had allowed all of its qualifying low-income tracts to be designated as OZs, as well as placing an income cap on urban tracts that qualify as an OZ based on the poverty rate. Grady noted that tracts qualifying as an OZ based on poverty level cannot exceed 125 percent of statewide MFI.
Of course, stricter income rules could stymie investment, Rogers cautioned, noting that OZ expert Jimmy Atkinson used 2023 American Community Survey data to calculate a roughly 22 percent reduction in OZs under new requirements. Every state except a few with very small tract counts will see declines, with Michigan’s count, for example, falling 42 percent and Iowa’s by 37 percent. Puerto Rico will experience a particularly sharp drop without its special rule, reducing its OZ count from 700 to 175.
In addition, Atkinson speculated that the nation’s best-performing OZ tracts—those already experiencing redevelopment—are unlikely to re-qualify under OZ 2.0, making 2026 the “last chance” to enter the most successful OZs.
Lyons noted that the IRS, which is the designated OZ program administrator, will release a lot of regulations and guidance on policy, clarification of definitions and places eligible for designation as OZs over the next couple of months. She advised potential investors to keep an eye on the IRS’s OZ webpage.
Looking beyond 2027, Rogers expects that as multifamily fundamentals continue to improve, OZ tax incentives will spur tremendous new housing production. “We should note that the BBB creates some opportunities to alleviate challenges that make new construction in many neighborhoods financially infeasible, even with OZ tax benefits,” he said.
For example, that reduction of the substantial improvement requirement in rural zones opens the door to redeveloping, upsizing or adaptive reuse of existing buildings, which may be more financially viable than new construction.
He also pointed out the catalyzing impact OZs have on communities, incentivizing new housing supply, creating jobs and retail, and generating local and state tax revenue, as well as a “spillover effect” that spurs investment in adjacent low-income neighborhoods.
“This is the reset the Opportunity Zone program needed,” concluded Grady. “The fundamentals are stronger, the mission is clearer, and the timing is right. If you have land or a project in an Opportunity Zone, now is the time to take another look. The upside is back.”
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