Opportunity Zone Program Updates Under the One Big Beautiful Bill (OBBB)

August 4, 2025

By Josh Miller, CPA/PFS
Shareholder

The Opportunity Zone program was introduced in the 2017 Tax Cuts and Jobs Act (TCJA) to attract investment to economically disadvantaged areas. It offered investors a deferral on capital gain taxes and potential reductions in taxable capital gains if certain conditions were met. Under the original program, all capital gains deferred through investment in a Qualified Opportunity Fund (QOF) must be realized at the earlier of the sale date or Dec. 31, 2026.

Key Changes Under the OBBB

The OBBB permanently extends the Opportunity Zone program and modifies its benefits and requirements:

• Deferral period: Gains deferred through Qualified Opportunity Zone (QOZ) investments made after Dec. 31, 2026, will now be recognized five years after the investment date, rather than on a fixed date.
• Basis step-up: A permanent 10% basis step-up is applied just before the end of the five-year deferral period. The previously available additional 5% step-up at the seven-year mark has been eliminated.

Example: If an investor invests $100,000 of capital gain proceeds into a QOF on Jan. 1 2027, she will report and pay tax on a capital gain of $90,000 on Jan. 1, 2032.*
*Calculation: $100,000 original gain - $0 original basis +($100,000 * 10% = $10,000 step-up)

Investments made under the QOZ program prior to the end of 2026 will continue to follow the rules established under the TCJA.

Introduction of Qualified Rural Opportunity Funds (QROFs)

To better direct investment into underserved rural areas — defined as any area excluding cities or towns with populations over 50,000 or their adjacent urbanized zones — the OBBB introduces Qualified Rural Opportunity Funds (QROFs). These funds:

• Function similarly to traditional QOFs.
• Require 100% investment in rural-designated QOZs.
• Offer a rolling 30% basis step-up after five years.

New Sunset Rules

The legislation replaces the prior sunset on gain elimination with a 30-year rolling window:

• For QOF investments held and disposed of after 10 years but before 30 years, basis will be stepped up to fair market value at the time of sale.
• For those held 30 years or more, basis will be stepped up to the fair market value on the investment’s 30th anniversary.

Important Reminders

It is important to reiterate that any capital gains deferred through a QOF investment prior to Dec. 31, 2026, will still be taxable in 2026. In addition, taxpayers must consider whether any potential QOF investment should be delayed until 2027 or after.

Whether you are planning new investments or preparing for the recognition of deferred tax on prior investments, your Honkamp tax advisor is ready to help.