Quick Take: The new “One Big Beautiful Bill” makes the Qualified Opportunity Zone (QOZ) program permanent while introducing major updates. Key changes include a rolling 10-year designation cycle, a narrower definition of eligible zones and updated tax incentives. It also introduces a new Qualified Rural Opportunity Fund category. Investors still have until Dec. 31, 2026, to invest under the current rules. With expanded reporting requirements and greater complexity, success in “QOZ 2.0” will require experienced sponsorship and rigorous due diligence.
On July 4, President Trump signed H.R. 1, the “One Big Beautiful Bill,” into law, marking the most significant update to the Qualified Opportunity Zone (QOZ) program since its creation in 2017. More than just a continuation, “QOZ 2.0” makes the program a permanent part of the federal tax code. It also tightens eligibility and clarifies key rules. Importantly for investors, the new law also expands compliance and reporting requirements, with higher penalties for noncompliance. That makes rigorous due diligence and experienced sponsorship more critical than ever.
Disciplined, long-term investors looking for a way to manage capital gains and diversify into real assets now have long-term certainty—along with the substantial tax benefits that are a hallmark of the program. Navigating the updated landscape will require a clear understanding of the new compliance standards and a commitment to working with proven partners.
Key Structural Reforms
For current investors, the existing program remains as designed: Investors who enter the program before Jan. 1, 2027, will pay capital gain taxes realized prior to that date, and then their investment appreciates tax-free for 10 years. The new law does not modify or extend the existing program. Here’s a look at the most important changes.
10-year designation cycle: One of the most consequential reforms is the shift to a rolling 10-year designation cycle for QOZs. Starting July 1, 2026, U.S. state governors will select new QOZ tracts every decade. Each new set of designations goes into effect on Jan. 1 of 2027, then 2037, 2047 and so on.
New definition of “low-income”: In tandem with this change, the new law changes the definition of a “low-income community”—the core criterion for QOZ eligibility. It’s now narrower. A tract must have a median family income that is 70% or less of the statewide or metropolitan median, down from the previous 80% threshold. This adjustment is projected to disqualify about 22% of the currently designated zones starting in 2027. It reduces the number of eligible tracts and increasing the selectivity of future investments.
For investors, both of these changes could mean fewer—but potentially higher-quality—QOZ tracts.
Updated Tax Incentives
The new QOZ law updates the timing and structure of the tax deferral and exclusion benefits that originally made the program so attractive.
For capital gains invested on or after Jan. 1, 2027:
- Gains are deferred for five years from the date of investment.
- After a five-year hold, investors receive a 10% step-up in basis.
- If the investment is held for 10 years or more, investors pay no capital gains tax on the appreciation when the asset is sold.
- The tax-free growth benefit is now capped at 30 years, after which any gains beyond that point are taxable.
It may be advantageous for investors who can defer triggering a capital gain until Jan. 1, 2027, to invest in the new QOZ program with its updated benefits.
New Program: Rural Opportunity Funds
The updated law introduces Qualified Rural Opportunity Funds (QROFs), which offer enhanced tax benefits for investments in designated rural zones. Investors in QROFs can receive a 30% basis step-up after five years—triple the standard benefit—along with a lower threshold for substantial improvement of existing properties. That makes rural development more attractive than ever.
What Didn’t Make the Final Law
Between the House and Senate versions, not all the proposed changes made it to the president’s desk. Provisions that would have enabled QOZ funds to invest in other funds—the “fund-of-fund” model—were left out. That means investors lost an opportunity to get even more diversified exposure within QOZ investments.
A House proposal allowing taxpayers to invest up to $10,000 of ordinary income into QOZ funds annually also was excluded. And no extension of the current program means the deferral date for investors through 2026 remains Dec. 31, 2026. Current zones will expire on Dec. 31, 2028.
Other Benefits for Investors
The new law also includes other key benefits for investors.
QBI deduction: The new law makes the qualified business income (QBI) deduction under Section 199A permanent. QBI refers to the net income earned from pass-through entities like sole proprietorships, partnerships, S corporations and certain LLCs. The 20% deduction reduces taxable income for eligible business owners and boosts after-tax returns for real estate investors and entrepreneurs.
Estate tax exemption: The law locks in the federal estate tax exemption at $15 million per individual. It starts in 2026 and is indexed for inflation. This preserves favorable conditions for intergenerational wealth transfers and estate structuring.
1031 exchanges: For real estate investors, the bill preserves 1031 exchanges in full. That means investors can continue to defer capital gains when proceeds from a real estate sale are reinvested in qualifying property. Earlier proposals to limit or eliminate 1031 exchanges didn’t make the final bill, preserving a key tax-advantaged strategy for investors.
Bonus depreciation: Another component of the new QOZ law restores and makes permanent 100% bonus depreciation. This allows businesses to immediately deduct the full cost of qualifying assets—including equipment and certain improvements—in the year they’re placed in service. For real estate investors and operating businesses, this could mean accelerated tax savings and improved cash flow when investing in capital-intensive assets.
Moving Forward
The changes introduced by the new QOZ law bring both opportunity and complexity. For prospective QOZ fund investors, it enhances the long-term upside. The permanent status of QOZs is a net positive for long-term planning. But the program is now more selective and complex. Success will depend on careful deal selection, rigorous due diligence and a clear understanding of the new compliance landscape. As a sponsor with deep experience in QOZ investing, we will continue to monitor evolving regulations and provide guidance to help investors navigate this new landscape.
