Quick Take: The new law making Opportunity Zones permanent introduces stricter eligibility, updated tax incentives, and expanded compliance requirements. While it starts Jan. 1, 2027, investors can still access key benefits under the original program, including tax-free gains after a 10-year hold. The article explains the key changes introduced in QOZ 2.0, how they impact existing investments, and why investors face a narrowing window to act under the original rules. It also details Origin Investments’ strategy for targeting high-quality sites across both QOZ versions.
With the passage of H.R. 1, the legislation that makes the Qualified Opportunity Zone program a permanent part of the federal tax code, a new era has begun for long-term investors managing capital gains. The new QOZ program goes into effect on Jan. 1, 2027. But investors can still take advantage of meaningful QOZ benefits until the original QOZ law expires. Most notably, they continue to be able to eliminate capital gains on qualified investments held for 10 years.
Origin’s Approach: Strategic Site Selection, Data-Driven Decisions
As a veteran QOZ fund manager, we are preparing for the new environment of QOZ 2.0 and closely monitoring new information. Our strategy for our first two QOZ funds, which raised about $600 million, and our current QOZ III Fund is straightforward and aligned with our overall approach to site selection: We look for the most promising blocks with strong population and job growth, a diverse economy, and higher forecasted demand than supply. We leverage our machine-learning platform, Multilytics®️, to guide our investment decisions. We seek to enhance the performance of our OZ funds with local tax incentives where possible.
While we consider the path forward with potential future QOZ funds, we know that good opportunities will continue to be available—particularly for sponsors with deep local relationships. For now, we are focused on deploying capital in our open QOZ Fund III, which closes at the end of this year.
‘QOZ 2.0’: New, Improved—and Permanent
The first QOZ law, enacted as part of 2017’s Tax Cuts and Jobs Act, is scheduled to sunset on Dec. 31, 2026. The new “QOZ 2.0” is now a permanent part of the tax code and will commence on Jan. 1, 2027. It retains the original law’s core advantages for investors: capital gains tax exclusions after 10 years and a 10% step-up in basis after five years.
Below is a summary of the current QOZ law versus the next version.
QOZ 1.0 Vs. QOZ 2.0
How Does QOZ 2.0 Affect Current QOZ Investors?
If you’re a current Opportunity Zone investor, rest assured: The new QOZ legislation does not retroactively change the core benefits you receive. Existing investors still defer capital gains until the end of 2026, receive the originally structured step-ups in basis, and exclude post-investment gains on assets held for at least 10 years. The new law does not, however, extend the deferral period or enhance legacy benefits. Property in existing zones will remain qualified, and existing funds will be required to comply with stricter reporting requirements.
The lengthy period of time between H.R. 1’s enactment and the Jan. 1, 2027, effective date of QOZ amendments should give the Treasury Department more than enough time to finalize the regulatory guidance for the operation of the new law. In the meantime, we will continue to monitor this new environment, and we encourage investors to stay informed with their fund managers as well.
Is QOZ 1.0 Still Worth Investing In?
The answer to this question is different depending on each investor’s unique circumstances. If they expect to reap capital gains before QOZ 2.0 begins, we believe that it will remain an attractive option. Investors still receive the core benefit of permanent capital gains exclusion after 10 years—an advantage over paying taxes on any gains received. (If timing is an issue, and depending on the source of the gain, investors could instead employ a tax-advantaged 1031 exchange.)
Below is a hypothetical $1 million investment into a QOZ fund with a 10% rate of return.
QOZ vs. Non-QOZ Investment
Next Steps
Investors should weigh their decisions on their current tax situation, risk tolerance and investment horizon. While QOZ 2.0 is an exciting development for disciplined investors, investing capital gains in a QOZ 1.0 fund remains a highly effective way to defer and potentially eliminate taxes on both the original gain and future appreciation.
