The OZ program was created under the Tax Cuts and Jobs Act of 2017 to direct private capital into economically distressed areas across the United States. These designated areas, often referred to as economic opportunity zones, are selected low-income census tracts where investment is encouraged through favorable tax treatment.
Roughly 12 percent of all U.S. census tracts, have been designated as Opportunity Zones across all 50 states, Washington, D.C., and U.S. territories. According to the Joint Committee on Taxation, nearly half of these zones received some level of investment between 2018 and 2020, though capital has been highly concentrated, with just 1 percent of zones receiving 42 percent of total investment.
At its core, the program is designed to stimulate long-term economic growth, fund infrastructure, and support housing development in underserved communities while offering investors meaningful tax advantages.
Qualified Opportunity Funds (QOFs) are the primary investment vehicles used to deploy capital into Opportunity Zones. These funds are typically structured as partnerships or corporations that invest at least 90 percent of their assets into qualified property or businesses located within designated zones.
Any individual or entity with eligible capital gains can invest in a QOF. These gains must be reinvested as equity, not debt, within a specific timeframe following realization. Investors tend to be high-income individuals, with average annual incomes around $4.9 million, placing them in the top percentile of earners.
Investment activity has leaned heavily toward real estate. Approximately two-thirds of investments have been directed toward real estate, construction, and lodging sectors, while less than 3 percent has flowed into operating businesses. Multifamily housing dominates many markets, with some regional studies showing nearly three-fourths of projects focused on residential development.
The opportunity zones tax incentive offers three primary tax advantages that make it particularly attractive for long-term investors.
• Deferral of capital gains
Investors can defer taxes on prior capital gains by reinvesting them into a QOF. Taxes are deferred until the earlier of the date the investment is sold or December 31, 2027, depending on current legislation.
• Step-up in basis
While earlier versions of the program allowed for 10 percent and 15 percent step-ups, newer provisions emphasize targeted incentives such as a 10 percent reduction after five years and up to 30 percent for certain rural investments.
• Tax-free appreciation
The most compelling benefit is the ability to eliminate taxes on new gains generated from the investment if held for at least 10 years. This applies to appreciation from business growth, property value increases, and operational performance.
This structure allows investors to combine tax efficiency with long-term capital growth, particularly in a real estate opportunity zone context where appreciation can be substantial.
Opportunity Zones are selected based on income thresholds and economic indicators. Investors often rely on tools such as the opportunity zone map and IRS opportunity zones maps to identify eligible locations and assess viability.
To qualify, investments must meet several criteria:
• Substantial improvement requirement
For real estate, the investor must significantly improve the property, generally doubling its basis within a specified period.
• Qualified business criteria
Businesses must derive a substantial portion of their income from activities within the zone and meet asset and operational thresholds.
• Excluded industries
Certain businesses, such as gambling or liquor stores, are excluded from eligibility.
Compared to other federal programs, eligibility requirements are relatively flexible. There are no mandatory low-income tenant requirements or oversight board mandates, making the program more accessible while still targeting community impact.
The OBBBA introduces major reforms to the Qualified Opportunity Zone program, effective January 1, 2027, while retaining prior rules for earlier investments. The program becomes permanent, with zones redesignated every 10 years starting July 1, 2026. Capital gain deferral shifts to five years post-investment, replacing the December 31, 2026 deadline. Investors can still receive a 10% basis increase after five years, with an enhanced 30% increase for certain rural investments.
Enhanced reporting requirements begin for tax years after July 4, 2025, applying to all existing investments. Failure to comply may triggerIRS penalties of up to $50,000, reinforcing stricter oversight and transparency across the program.
These changes aim to ensure that investments produce measurable economic outcomes rather than simply serving as tax shelters. Many projects now combine OZ benefits with other incentives, such as Low-Income Housing Tax Credits and even complementary strategies like R&D Tax Credits where applicable.
The program is designed to attract private investment into economically distressed communities. By offering tax incentives, it encourages long-term capital deployment into housing, infrastructure, and businesses, ultimately driving job creation and economic revitalization in areas that historically lack investment.
To participate, an investor must reinvest eligible capital gains into a QOF within a defined period after realizing those gains. The investment must be structured as equity, not debt, and must remain in the fund to access the program’s tax benefits, particularly the long-term exclusion of gains.
The primary benefits include deferral of existing capital gains, potential reduction of taxable gains through basis adjustments, and full exclusion of new gains if the investment is held for at least 10 years. Together, these create a strong incentive for long-term investment strategies.
Eligible projects include multifamily housing, mixed-use developments, infrastructure improvements, and certain operating businesses. Real estate projects must meet substantial improvement requirements, while businesses must operate primarily within the zone and meet asset and income thresholds.
Recent reforms made the OZ Program permanent, introduced a decennial (every ten years) re-designation process for zones, tightened eligibility criteria for census tracts, and enhanced compliance and reporting requirements. The reforms also created special rules for rural areas and removed the previous sunset date for new investments, allowing ongoing deferral opportunities
For more than four decades, Bennett Thrasher has provided businesses and individuals with strategic business guidance and solutions through professional tax, audit, advisory, and business process outsourcing services. Contact Trey Webb, partner in charge of Bennett Thrasher’s Real Estate and Hospitality Tax Group, or call us at 770.396.2200.
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