President Trump Signs ‘One Big Beautiful Bill Act,’ Adopting Permanent Qualified Opportunity Zone Provisions with Rolling Deferral

The final text of the OBBBA enacted by Congress and signed into law by the president includes almost all of the changes made to the QOZ statute that the Senate published on June 16, 2025 (Earlier Senate Version). See GT Alert, June 20, 2025.

Current Law

Under current law, taxpayers can obtain the income tax benefits of the QOZ provisions by timely investing capital gain realized on or before Dec. 31, 2026, into a QOF. Under the OBBBA, investors will still recognize the capital gains they deferred under current law (Existing Deferred Gains) no later than Dec. 31, 2026 (either recognizing such Existing Deferred Gains in full or as discounted if held for the requisite five- or seven-year holding periods prior to such date) and may still obtain an exemption from U.S. federal income tax on capital gains, if any, from the sale of the QOZ investment after a holding period of 10 years (provided that the QOZ conditions are met). The window for making a timely investment in a QOF is 180 days from (i) the day that a taxpayer (or a passthrough entity in which the taxpayer holds an interest and thereby is entitled to an allocation on Schedule K-1) realizes capital gain, (ii) the last day of such passthrough entity’s taxable year if such entity itself does not make an investment of such capital gain in a QOF, or (iii) the due date (excluding extensions) of such passthrough entity’s due date for filing its annual federal tax return (Investment Period). For example, 2024 capital gains reported to an investor on a form K-1 for 2024 must be invested in a QOF by Sept. 11, 2025, in order to benefit from the QOZ incentive.

OBBBA QOZ Operative Provisions

• The OBBBA makes the QOZ incentive permanent under the Internal Revenue Code and retains the current law Investment Period requirements described above.
• Under the OBBBA, capital gains (including capital gains realized by taxpayers in 2026 that are subject to an Investment Period that ends in 2027) may be invested in QOFs starting Jan. 1, 2027, benefitting from the changes made by the OBBBA.
• The OBBBA requires recognition of gains realized and deferred under the QOZ incentive after 2026 upon the earlier of (a) a taxpayer’s disposition of its QOF investment or (b) five years after a taxpayer’s investment in a QOF. This rolling five-year deferral date is an important change from the outside deferral date of Dec. 31, 2033, and periodic decennial deferral dates under the Earlier Senate Version and the version of the bill that the House published on May 22, 2025 (Earlier House Version).
• In addition to deferral of invested gain, taxpayers investing in QOFs on or after Jan. 1, 2027, will receive:

– a 10% step-up in tax basis for investments held in a QOF for at least five years (eliminating the incremental step-ups that investors would have received during the deferral period under the Earlier Senate Version); and

– exclusion of gain by investors upon exit for investments held in a QOF for at least 10 years (including gain that otherwise would be recognized as depreciation recapture).

• The OBBBA adopts the Senate Version (which closely mirrored the Earlier House Version) in allowing for Qualified Rural Opportunity Fund (QROF) enhancements, including (i) a 30% step-up in tax basis for QROF investments held for at least five years (as compared to the 10% step-up for investments held in QOFs that are not QROFs) and (ii) a reduction of the substantial improvement requirement for Qualified Opportunity Zone Business (QOZB) property from 100% for investments made by QOFs to 50% for investments made by QROFs.
• The OBBBA adopts the Senate Version in providing a special rule for investments held for at least 30 years. If the investment is sold on or after 30 years, the taxpayer’s tax basis in the investment is stepped up to the fair market value of the investment as of the thirtieth anniversary of the investment. As a result, any further appreciation in value after the thirtieth anniversary would be subject to tax at the time of sale.
• The OBBBA adopts the Senate Version’s (which maintained the Earlier House Version’s) increased limitations of statewide area income for eligible census tracts for QOZ designation to 70% (from 80% in current law), but the OBBBA does not require the House’s 30% rural QOZ set-aside. The overall reduction in state median income requirements from 80% to 70% may reduce the number of census tracts eligible for designation as compared to current law.
• The OBBBA adopts the Senate Version that repeals special disaster relief for QOZs in Puerto Rico for Hurricane Maria.
• The OBBBA does not provide for the automatic deferral of any interim gain from an investment sold within an investor’s 10-year QOF hold period, even if the proceeds are reinvested in another QOZ project within 12 months of the sale (however, the current law that allows for investors that are allocated interim gain to make a new deferral election and investment in a QOF with a new 10-year investment clock remains in effect).
• The OBBBA does not provide for a “fund of funds” concept among QOFs, nor a similar concept for QOZB investments in other QOZBs.
• The OBBBA does not contain any QOZ modifications to incentivize affordable or workforce housing.
• The OBBBA adopts the Senate Version (not following the Earlier House Version) in not allowing any investment of ordinary income or after-tax income into QOFs. (The Earlier House Version would have allowed such investments up to an aggregate lifetime maximum of $10,000 for each investor.)
• The OBBBA adopts the Senate Version (which closely mirrored the Earlier House Version) in providing reporting requirements for QOFs and QOZBs, including penalties for failure to report. The Senate Version makes such reporting mandatory upon the legislation’s enactment on July 4, 2025, and provides the IRS with $15 million of funding to enact reporting requirements.

Effective Dates

• The new deferral and permanency provisions in the final text of the OBBBA take effect for amounts invested in QOFs on or after Jan. 1, 2027. This effective date, which is consistent with both the Senate Version and the Earlier House Version, creates concerns for current QOF sponsors with respect to fundraising efforts undertaken before the QOZ provisions of the OBBBA become effective for QOF investments made on or after Jan. 1, 2027.
• States may designate new QOZs beginning on July 1, 2026. This designation date is six months earlier than the Jan. 1, 2027, QOZ designation date provided in the Earlier House Version (thus eliminating a potential 90-day period (or 120 days, if extended) during which no new QOZs would exist). A new designation period will commence every 10 years, on July 1.
• The OBBBA keeps both existing and future QOZs designated for a period of 10 years commencing on Jan. 1 following the date the Treasury Department certifies the QOZ. This provision allows all current QOZs to retain their QOZ status until Dec. 31, 2028 (as opposed to the end of 2026, as provided in the Earlier House Version).