What if you could defer, or even exclude, your capital gains taxes just by helping struggling communities? That’s the promise of Qualified Opportunity Zones (“QOZs”), a federal program that rewards investors who support revitalization efforts in areas that need it most.

Why Now? New Rules Make It Easier Than Ever.

Investing in rural QOZs just got more attractive!

On September 30, 2025, the IRS issued Notice 2025-50, providing updated guidance for taxpayers on how to meet the “substantial improvement” requirement for properties located in rural QOZs. Investors may now satisfy this requirement by improving a property by just 50% of its original basis — down from the previous 100% threshold.

How QOZs Work? A Proven Tax Strategy.

The QOZ idea took shape in 2017 when Congress established QOZs through the Tax Cuts and Jobs Act (“TCJA”). Under the TCJA, investors who reinvested capital gains from the sale of assets into Qualified Opportunity Funds (“QOFs”) within 180 days could defer taxes, receive a step-up in basis, and potentially exclude future appreciation from taxation. The deferred gain became taxable on the earlier of December 31, 2026, or the date the QOF investment was sold. Investors who held their QOF investment for at least 5 years qualified for a 10% exclusion of the original deferred gain, which increased to 15% after 7 years. Those who held their investment for 10 years or more could exclude all post-investment appreciation from federal capital gains tax.

2025 Legislative Update: More Flexibility, More Control.

On July 4, 2025, the One Big Beautiful Bill Act (“OBBBA”) changed the QOZ program. Effective January 1, 2027, the OBBBA replaces the one-time deferral deadline with a rolling five-year window from the date of each qualifying investment. The OBBBA simplifies the basis step-up to a single 10% after 5 years, retains the 10-year full exclusion of post-investment gains, and caps long-term appreciation by freezing the basis after 30 years. It also introduces new rules for rural zones, redesignates zones every decade, and imposes stricter reporting requirements.

The chart below outlines how QOZ features have changed following the OBBBA:

Feature	Relevant Internal Revenue Code Section	Pre-OBBBA Rules (TCJA)	Post-OBBBA Rules
Timing for Deferral of Capital Gains	IRC §1400Z-2 (a)	Capital gains could be deferred until the earlier of December 31, 2026, or the date the QOF investment was sold.	Gains may be deferred for up to 5 years from the date of each qualifying investment (rolling window).
180-Day Investment Window	§1400Z-2 (a)(1)(A)	Investors must reinvest capital gains within 180 days of realization (or alternate partnership/tiered dates).	Unchanged: 180-day reinvestment window retained for all new QOF investments
Step-Up in Basis for Deferred Gain	§1400Z-2 (b)	10% basis increase after 5 years; additional 5% after 7 years (only available for investments made by 12/31/2019).	Single 10% basis step-up after 5 years; 7-year benefit eliminated.
Permanent Exclusion of Post-Investment Gains	§1400Z-2 (c)	If held 10-plus years, investors may elect to step up basis to fair market value upon sale, excluding post-investment gains entirely.	10-year exclusion retained; however, basis is frozen at fair market value if held 30 plus years (capping further appreciation).
Opportunity Zone Designation Process	§1400Z-1 (c)(2)	One-time designation based on 2010 census data; zones locked in through 2026.	Zones subject to redesignation every 10 years beginning 1/1/2027; governors may select up to 25% of eligible tracts.
Puerto Rico Zone Designation	§1400Z-1 (b)	All low-income census tracts in Puerto Rico automatically designated as QOZs.	Puerto Rico subject to the same selection and redesignation rules as states (25% limit).
Qualification of Designations: “low-income communities”	§1400Z-1 (c)(1)(A)	Requires either a poverty rate of at least 20% or a median family income not exceeding 80% of the state or metropolitan median.	Median family income must not exceed 70% (down from 80%) of the state or metropolitan median. Tracts with a poverty rate of 20% or more are disqualified if their median family income exceeds 125% of the applicable median income.
Reporting and Compliance Requirements	§1400Z-2  (f); §§6039K, 6039L	Minimal reporting; no penalties for non-compliance.	Mandatory annual reporting for QOFs and QOZ businesses; substantial penalties for failure to file (up to $50,000).
Qualified Rural Opportunity Zones (“QROZ”)	§1400Z-2 (b)(2)(C)	Not applicable; no provisions for rural areas.	New category: A rural area is any area other than a city or town that has 50,000 or less residents. Investments in QROZ properties are eligible for 30% basis step-up after 5 years.
Substantial Improvement Requirement	§1400Z-2 (d)(2)(D)(ii)	Property must be significantly improved, meaning more than 100% of the purchase basis, excluding land.	For QROZs, the threshold is reduced from 50%; the 100% threshold remains the same for all other QOFs.

Now, consider the following scenario:

You sold your business in 2025 and realized a $10 million capital gain. Ordinarily, that gain would be subject to federal capital gains tax at a maximum rate of 23.8%. To mitigate this liability, you consider reinvesting the gain into a QOF.

At this point, a critical threshold question arises: which QOF regime would a new investment fall under — the existing, pre-OBBBA regime or the new regime scheduled to take effect in 2027?

Under the original QOZ framework, any capital gain deferred through a QOF investment must be recognized no later than December 31, 2026. As a result, a taxpayer who recognizes gain in 2025 and reinvests it immediately may receive only a short deferral period, significantly limiting the value of the incentive.

This creates a planning challenge — but also an opportunity.

One potential strategy is to structure the business sale as an installment sale, with the final $10 million payment received in 2027 rather than 2025. Under current IRS rules, each installment payment is treated as a separate gain recognition event, with its own 180-day window to reinvest in a QOF. By deferring receipt of the final installment until 2027, the associated gain may be eligible for reinvestment under the new OBBBA QOF regime, rather than being locked into the expiring pre-2027 rules.

This approach can effectively extend the deferral period beyond 2026 and align the investment with a more favorable opportunity zone framework.

Will this new structure work? Yes, using the installment sale approach may offer a planning opportunity for investors seeking to maximize deferral during the transition to the new rules. However, it is important to note that full IRS and Treasury guidance under the post-OBBBA QOZ framework has not yet been issued.

In the meantime, a solid understanding of the existing QOZ framework remains essential. The fundamental rules established under the TCJA are still in effect, and the Treasury Department and IRS issued three rounds of regulations in 2018 and 2019 to clarify how the program functions. For a deeper dive of QOZ mechanics like investor elections, exit strategies, and asset tests, please see Hanson Bridgett’s analyses of the 2018 regulations and the 2019 regulations. These remain valuable resources as we await additional guidance under the OBBBA.

Timing is critical. For individuals or businesses considering a QOF investment today, especially with major changes ahead, early planning can make a meaningful difference in your tax outcomes. If you have questions about QOZ investments or want to better understand how the OBBBA may impact your investment strategy, please do not hesitate to contact us.