The new One Big Beautiful Bill Act (OBBBA) boosts tax benefits for taxpayers who invest in low-income communities.
Strategy: Investigate the Qualified Opportunity Zone (QOZ) program. If you hold on to your investment long enough, you may qualify for special tax deferral—or even a tax exclusion. Most provisions in the OBBBA relating to these investments take effect on Jan. 1, 2027.
Here’s the whole story: The QOZ program was initially created by the Tax Cuts and Jobs Act (TCJA) at the end of 2017. The rules are extremely complex, but we can give you the basic lowdown. The main tax incentive is that you can defer tax on the capital gains tax that would normally be due if the gains are reinvested in a Qualified Opportunity Fund (QOF) within 180 days. Even better, you may completely avoid tax on the appreciation in value in the QOF investment if you keep the interest at least 10 years.
4 key tax changes The OBBBA provides additional tax relief to tax-savvy investors. Here are four key changes in the new law.
1. The OBBBA authorizes “rolling” t10-year QOZ designations. This means that the “census tracts” treated as QOZ properties will be reviewed every 10 years to determine if they’re still eligible. Furthermore, state governors will be able to redesignate OZs in their state based on the updated census tract information. However, eligibility requirements will be tightened.
2. Under current law, you can benefit from a step-up in basis equal to 10% of your taxdeferred gain if you hold the properties in a QOF for at least five years, Now the OBBBA adds an extra 5% step-up in basis if the investment is held for at least seven years. Caveat: For investments in QOFs made after 2026, you can retain the 10% exclusion of deferred gain, but you must give up the additional 5% step-up in basis. For purposes of “income recognition,” the date for investments made in QOFs after 2026 is the earlier of the date the investment is sold or exchanged, or the date that is five years after the investment in the QOF. However, investments made through the end of 2026 will keep an income recognition date of Dec. 31, 2026.
3. If you hold an investment in a QOF for at least 10 years, you currently can benefit from a step-up basis to fair market value (FMV) on the date the investment is sold or exchanged. The OBBBA allows taxpayers who hold their QOF investments for more than 30 years to increase their basis to the FMV of their investment on that 30-year anniversary date.
4. If a QOF invests in tangible property used in a rural opportunity zone, the 10% exclusion attributable to a five-year holding period is tripled to 30%. Note: Other special rules may apply. The changes in the QOZ program are coordinated with other tax provisions, including tax credits for investing in low-income housing. Call on your tax pro for more details.
Tip: These investments are not for the faint of heart. Tread carefully.