The Opportunity Zones Program: What Is It and How Did It Change Under the OBBA?

The Opportunity Zones program is one of the largest place-based capital deployment programs in U.S. history, with industry estimates placing cumulative investment under the original framework at approximately $100 billion. Created by the Tax Cuts and Jobs Act of 2017 and substantially revised by the One, Big, Beautiful Bill Act (OBBBA) in July 2025, it offers significant federal tax benefits to investors who reinvest capital gains into designated low-income communities. The program was primarily designed to attract real estate investment into qualifying development projects in these designated “opportunity zones.” This article summarizes how the program works, what it has accomplished and what changed under OBBBA.

Origin and Structure: “OZ 1.0”

The Opportunity Zones concept originated in an April 2015 white paper by economists Jared Bernstein and Kevin A. Hassett. It advanced through Congress with bipartisan support and was enacted in December 2017 as part of the Tax Cuts and Jobs Act.

The program is defined by two structural elements:

First, a federal map of designated census tracts. Between April and June 2018, Treasury certified 8,764 Opportunity Zones in all 50 states, the District of Columbia, and five U.S. territories. Approximately 97%  of these Zones qualified as low-income communities under the federal definition.

Second, a tax incentive structure built around three benefits available to investors who reinvest capital gains into Opportunity Zones through a Qualified Opportunity Fund (QOF) within 180 days of a realization event:

• Deferral of federal tax on the original gain until the earlier of disposition or December 31, 2026;
• A 10% step-up in basis for investments held for five years (available only to taxpayers who invested by December31, 2021), with an additional 5% for investments held for seven years (available only to taxpayers who invested by December 31, 2019);
• Full exclusion of federal capital gains tax on QOF appreciation if the investment is held for at least ten years

Thus, reinvestment of appreciated gains into qualifying real estate development projects through a QOF offered both tax deferral on the original gain and full tax exclusion on subsequent appreciation.

Deployment under OZ 1.0

Industry estimates place cumulative QOF capital deployment under OZ 1.0 at approximately $100 billion. These investments supported 313,000 new residential addresses in designated communities from Q3 2019 through Q3 2024. As expected, real estate investments dominated. They accounted for 68 percent of qualified Opportunity Zone business property in tax year 2020, far ahead of any other sector. Within these real estate investments, multifamily housing led the way: industry analysis found that 79.9 percent of tracked QOF dollars had a residential component, of which 91.2 percent was multifamily housing.

For tax year 2020, the median individual investor reported adjusted gross income of approximately $730,000 and deferred approximately $250,000 in capital gains through a QOF. Entity investors averaged approximately $4 million per investment.

Limitations on OZ 1.0

Two issues drew sustained criticism during the OZ 1.0 period.

Geographic concentration. In the program’s early years, approximately half of designated tracts had received no qualified investment. Most capital flowed into a minority of tracts that already showed signs of upward economic trajectory.

Reporting infrastructure. The original program did not require disclosures sufficient for Treasury to assess performance against the program’s intended outcomes. The Government Accountability Office twice recommended that Congress expand Treasury’s data collection authority. Several bipartisan reform bills were introduced between 2019 and 2023. But none were enacted before the program approached sunset.

The OBBBA and OZ 2.0

OBBBA made the Opportunity Zones program a permanent feature of the Internal Revenue Code. The reformed investment framework, commonly referred to as OZ 2.0, takes effect on January 1, 2027. Designation of qualifying Opportunity Zones will follow a 10-year decennial cycle, with the first decennial determination date set for July 1, 2026, and the original 8,764 designations phase out under transition rules. The new reporting and penalty regime, however, runs on an earlier timeline. It applies to taxable years beginning after July 4, 2025, which for most calendar-year filers means the 2026 tax year. These obligations are therefore already live and reach existing OZ 1.0 funds, not only post-2026 investments.

Overall, OBBBA introduced eight substantive changes:

• Permanent program status with decennial redesignation;
• Revised gain deferral structure (rolling 5-year deferral for post-2026 investments);
• Simplified basis step-up (10 percent at five years; OZ 0’s 7-year tier eliminated);
• New Qualified Rural Opportunity Fund category with enhanced tax treatment;
• Tightened criteria for qualifying tracts, including elimination of contiguous-tract eligibility and a stricter median family income threshold;
• 30-year cap on the tax-free appreciation benefit: for investments held beyond 30 years, basis is fixed at fair market value on the 30th anniversary and appreciation after that date becomes taxable;
• Two new reporting regimes for QOFs and investors under sections 6039K and 6039L;
• New civil penalty regime for reporting noncompliance under section 6726.

What OZ 2.0 Means

For investors holding OZ 1.0 positions, the most immediate item is the December 31, 2026, deferred gain inclusion event. Every dollar of deferred gain becomes recognized income on that date, regardless of whether the underlying investment has been sold. The five-year basis step-up remains available to qualifying taxpayers (those who invested by December 31, 2021). But cash to satisfy the resulting tax liability must be sourced separately.

For investors looking to deploy real estate capital past 2027, the OZ program is no longer a temporary incentive. It is now a permanent federal tax structure with revised terms and meaningfully expanded compliance obligations.

How Fredrikson Can Help

The Opportunity Zone program continues to evolve, creating both opportunities and compliance considerations for investors, developers, fund sponsors and businesses. Fredrikson advises clients on Opportunity Zone investments, fund structuring, tax planning, real estate development and related regulatory matters.

For more information about Opportunity Zone investments, Qualified Opportunity Funds, fund formation, tax planning or development projects, contact Christian Hokans.