Background on the Qualified Opportunity Zone Program
The Qualified Opportunity Zone (QOZ) program was enacted in 2017 to promote economic development in low-income communities by allowing investors to defer taxes on capital gains through investments in Qualified Opportunity Fund (QOF) vehicles. Capital gains taxes are deferred through Dec. 31, 2026, with the potential for reducing up to 15 percent of the tax (and complete elimination of capital gains tax on any increase in the value of the QOF investment if the investment is held for 10 years).
The One Big Beautiful Bill Act made the Opportunity Zone program permanent and significantly increased its attractiveness, particularly for a new category of Qualified Rural Opportunity Funds (QROFs).
New rules for Qualified Opportunity Funds and Qualified Rural Opportunity Funds
While there are some immediate changes to the QOZ rules, the most important improvements apply to QOF investments made after Dec. 31, 2026. The capital gains tax deferral is on a rolling basis for five years after the QOF investment, and can be decreased by 10 percent if the investment is held for five years. As before, there will be no capital gains tax on any increase in the value of the QOF investment if the investment is held for 10 years (although the untaxed increase in value is limited to the fair market value of the investment at the end of 30 years if it is held for a longer period).
Of the 8,762 census tracts currently designated as opportunity zones, around 38 percent also qualify as rural opportunity zones. There’s an IRS notice specifying the current opportunity zone census tracts that also qualify as rural opportunity zones. In New York 105 census tracts are classified as rural. The definition of rural is not intuitive; for example, there are two rural opportunity zones that are essentially adjacent to the Cornell University campus in Ithaca, NY.
QROF projects are tremendously tax advantaged — there’s a 30 percent reduction in the capital gains tax due (instead of 10 percent) if the investment is held for five years. Also, the business property in the project that is not original use property must only be substantially improved by an amount equal to 50 percent of the adjusted basis (as opposed to 100 percent for property acquired in non-rural projects).
There will be new designations of QOZ census tracts by July 1, 2026, to be effective Jan. 1, 2027, for 10 years (also there is carryover of current designations to a certain extent). Additionally, there are new reporting requirements to address the issue of not having current data collection that permits any evaluation of the effectiveness of the tax incentives in encouraging development.
Who Benefits from the New QOF and QROF rules
While there are some increased benefits for investors in QOF vehicles now, the most significant advantages apply to investments made beginning Jan. 1, 2027. Developers of all types of commercial/residential projects may wish to consider the potential applicability of the new QOZ regime — projects that qualify can have a noteworthy reduction in the cost of capital.
And while access to investors with capital gains may appear to be a barrier, the tax breaks of these rules are rich enough to bear the cost of financial intermediaries who can locate investors. There will also be sponsors of QOF funds and probably separate QROF funds looking for investment grade projects.
Harris Beach Murtha’s Tax Practice Group is tracking opportunities such as this and related matters. If you need assistance with a tax matter, please reach out to attorney James B. Mann at (917) 733-4043 and jmann@harrisbeachmurtha.com, or the Harris Beach attorney with whom you most frequently work.
This alert is not a substitute for advice of counsel on specific legal issues.
Harris Beach Murtha’s lawyers and consultants practice from offices throughout Connecticut in Bantam, Hartford, New Haven and Stamford; New York state in Albany, Binghamton, Buffalo, Ithaca, New York City, Niagara Falls, Rochester, Saratoga Springs, Syracuse, Long Island and White Plains, as well as in Boston, Massachusetts, and Newark, New Jersey.
