Among the many provisions in the massive One Big Beautiful Bill Act passed into law this month is the permanent extension of the Opportunity Zone program, along with some tweaks to how they work. Making the program permanent and allowing investors to participate on a five-year rolling basis should make it more attractive for financial advisors looking for tax breaks for their clients, since they will no longer have to worry about an upcoming sunset date. However, in the short term, the timing of the rollout of the updates will likely mean lower demand for OZ investments, industry insiders say.
The initial OZ program, which was rolled out as part of the 2017 Tax Cuts and Jobs Act, allowed investors to defer taxes on capital gains until Dec. 31, 2026, if they reinvested their net profits into a qualified opportunity zone fund within six months. The program also eliminated part or all of the deferred gain when investors held their money in the fund for five years or longer.
The new legislation makes the program permanent and calls for the creation of new Qualified Opportunity Zones every 10 years. It allows investors to benefit from a capital gain deferral on a rolling five-year schedule, though it caps the deferred gain elimination at 10%, unlike the original program, which featured an additional 5% step-up in basis when investors held their position for seven years. The new program will require more detailed reporting requirements and a new penalty provision. For example, it calls for reports to the IRS regarding investors that dispose of an investment in a qualifying fund. The legislation also tightens the criteria that determine which census tracts can qualify for OZ designation. Currently, such tracts cannot have a median family income that exceeds 80% of the local state or metropolitan area figure. That figure has been lowered to 70%.
In addition, OBBBA has created a new fund category for rural areas, the Qualified Rural Opportunity Fund, which will offer investors a rolling 30% basis step-up after a five-year hold. This new option, with its outsized tax benefits, including a 100% bonus depreciation for equipment and manufacturing facilities, is already gathering a significant level of interest from investors, noted Jason Watkins, partner and head of the OZ working group at professional services firm Novogradac & Co.
Overall, “the new permanence of the program is critically important,” said Jeff Evans, director of government affairs and policy at the Institute for Portfolio Alternatives, an industry association that focuses on alternative investments. “What that means is that any investment made at any time in the future could then be eligible to get that five-year deferral at a minimum. The way it was previously constructed, if [people] made the investment seven or 10 years into the program, they couldn’t.”
According to John Grady, executive director of the Alternative & Direct Investment Securities Association, program updates like the standardized deferral periods and the introduction of rolling tract designations should help advisors use OZs in multi-year portfolio planning. “For advisors and clients considering OZ investments, this allows for better long-term planning, including the use of sequential investments, each with its own clear deferral window,” he wrote in an email.
Over the past two years, as the initial OZ sunset date began to loom and uncertainty over whether the program would get extended lingered, it made less sense for investors to allocate new money to it, since they would miss out on most of the tax breaks. This led to a slowdown in fundraising. For example, between September 2021 and March 2022, the volume of equity raised by qualifying Opportunity Zone funds rose by over $8 billion, or almost 40%, according to Novogradac. However, between June 2024 and March 2025, OZ equity fundraising increased to $2.6 billion, or roughly 6.8%, to $40.9 billion.
Real estate investment companies that work with financial advisors on OZ projects confirm this trend. For example, Michael O’Shea, head of private wealth with Origin Investments, a Chicago-based multifamily real estate fund manager, noted that the firm would typically use proceeds from the refinancing of its construction loans to pay its OZ investors back 30% to 40% of their initial allocation within four or five years of their initial investment. Investors could then use those proceeds to fund their future tax liability, O’Shea noted.
However, with only a year left before the OZ program was set to expire, Origin would not have had the time to finish new projects and refinance to deliver those proceeds. “It was causing a lot of problems structurally with OZs, so the fundraising for pretty much all firms has really fallen off a cliff, [with investors] waiting to see what happens,” O’Shea said.
Evans noted that he expects the slowdown in OZ fundraising to continue for the next 12 to 18 months, until the updated program takes effect on Jan. 1, 2027. Part of the reason is that the OBBBA legislation still leaves a “dead zone” period between the expiration date of OZ 1.0 and the start of OZ 2.0, as O’Shea describes it.
Another issue is that both fund managers and financial advisors need more clarity around exactly how the updated rules will work, according to Mike Miller, co-founder and president of Peakline Real Estate Funds, a Chicago-based private real estate investment firm that also works with financial advisors on OZ projects. Miller noted that, similar to the period after the original OZ program went into effect at the end of 2017, Peakline is consulting with both its lawyers and tax accountants on how to interpret the new legislation. For example, it’s not clear yet how new OZ zones that can be established after July 1, 2026, will work within the framework of new program revisions that won’t go into effect until the start of 2027, according to a July 7 note from global law firm Seyfarth Shaw LLP. Another area that needs further guidance has to do with the new IRS reporting requirements.
“There hasn’t been any Treasury guidance issued yet, and there may not be for some time,” said Miller. “Like any legislation, there may be a host of questions. So, we are studying what the rules say, and trying to figure out what isn’t said there.”
Miller anticipates that while there may be a continued lull in OZ activity in the coming months (Peakline, for example, doesn’t have any open OZ funds at the moment after raising $1.2 billion and completing 19 projects through the program), advisors will start planning new allocations sometime in 2026.
“It’s one of the really significant tax benefits that someone who has capital gains can use,” he said. “It’s a fairly flexible program in that they can invest any portion of their capital gain. These are not the same rules around it as a 1031 exchange, which are very restrictive. The QOZ rules are much more flexible, and we found a great interest from advisors and their clients.”
Novogradac’s Watkins notes that the firm expects a significant spike in OZ fundraising in 2027, once the program updates take effect. “We expect that investors with the ability to delay a capital gain recognition event until 2026 will seek to do so to delay their required QOF investment to January 1, 2027, or later to take full advantage of the additional OZ benefits. This will likely reduce the overall level of QOF investments, particularly in the second half of 2026, but we expect this to be followed by a massive increase in investment in early 2027,” he wrote.
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