News & Insights

“One Big Beautiful Tax Bill” and Opportunity Zones (OZ)

We have now seen the Senate Finance Committee’s version of the “One Big Beautiful Tax Bill,” and it bodes well for opportunity zones (OZ) — an economic development tool designed to spur economic investment in distressed communities while providing tax breaks to investors.

Since the program was introduced through the Tax Cuts and Jobs Act of 2017, OZ funds have raised billions of dollars. Now, the federal government appears poised to expand and refine the program.

The House of Representatives’ version of the “One Big Beautiful Tax Bill” created a new window for opportunity zones beginning Jan. 1, 2027. Meanwhile, the Senate Finance Committee’s version of the bill would make those changes permanent and adopt some of the following modifications:

New opportunity zones

Opportunity zone tracts would be designated every 10 years beginning Jan. 1, 2027, and limited to census tracts where the median family income does not exceed 70% of the area/statewide median family income — a reduction from the current rules which require an 80% threshold. For tracts with poverty levels of at least 20%, a new cap of 125% of area/statewide median family income would apply. Unlike the House version, which had a minimum number of rural census tracts to be designated, the Senate version eliminates this provision. Additionally, census tracts contiguous to low-income areas lose automatic eligibility and would need to independently qualify to be opportunity zones. Puerto Rico would also lose its special status.

Tax benefits for new opportunity zones

Capital gains invested in a qualified opportunity zone by way of a qualified opportunity zone fund (QOF) on or after Jan. 1, 2027, would be eligible to defer their gain until Dec. 31, 2033. Gains invested after Jan. 1, 2034 would also qualify for deferral until Dec. 31, 2043. However, any gain deferred prior to Dec. 31, 2026 would be deferred until Jan. 1, 2027.

Basis step-up

Gains deferred on or after Jan. 1, 2027 get a 10% discount by means of a tax basis step up. Unlike current law, which require a five- or seven-year holding period to receive a discount, the new structure offers a graduated basis increase: 1% per year for the first three years, 2% for the following two years, and 3% at the end of year six.

Rural opportunity zones

Both the House and Senate versions of the bill emphasize investments in rural communities. In the Senate’s version of the bill, the investments in a designated rural opportunity zone after Jan. 1, 2027, would receive a 30% basis step-up over six years — triple the standard increase. The 30% basis step up would follow this schedule: .3% after the end of the first three years, then 6% at the end of the next two years and 9% at the end of the sixth year. Additionally, the substantial improvement test would also be modified by requiring the additional investment only equal to 50% of the cost basis of the property instead of 100%. A rural area is defined as any area except a city or town with a population greater than 50,000 that is contiguous to an urban area. The Senate did not include a House provision that allows investors to defer gains on up to $10,000 of ordinary income.

Holding period rules

Under existing law, if an opportunity zone investment is sold after 10 years but before Dec. 31, 2047, an election can be made to exclude the gain from the sale. The Senate Finance Committee would remove the 2047 deadline and instead allow investments held for more than 30 years to be adjusted to fair market value for tax basis purposes. It remains unclear whether this adjustment would result in a new depreciable basis for investors.

Reporting rules

Both the House and Senate would require new reporting information and introduce penalties for failure to report new investments.

Conclusion

The proposed changes to OZ investing offer new opportunities as well as challenges for commercial real estate investors and developers. While the enhanced tax incentives could be significant — especially for rural investments — more rigorous reporting requirements could also be problematic. The ultimate effect on OZ investors will, of course, hinge on the final legislation and how stakeholders respond to the changes.

The article was published in The Los Angeles Daily Journal and The Daily Transcript (subscriber only).

About Crosbie Gliner Schiffman Southard & Swanson LLP (CGS3)

CGS3 is a recognized leader among a new generation of commercial real estate law firms with practice areas covering the entire commercial real estate life cycle, including finance, acquisition/disposition, entity formation, tax, development, land use, leasing, distressed asset workouts and dispute resolution. Earning a reputation as one of California’s leading commercial real estate law firms, CGS3 continues to recruit some of the state’s top real estate attorneys from both large corporate firms and senior in-house positions. For more information, visit http://www.cgs3.com.