OBBBA Revives (and Reshapes) Opportunity Zones:
 How to Use QOFs to Crush Capital Gains

October 2025

The One Big Beautiful Bill Act (OBBBA) didn’t just keep Opportunity Zones alive. It made the program permanent, tightened zone eligibility, and changes investor incentives starting January 1, 2027. Below is the upgraded, client-ready explainer with a now-vs-later comparison, a timeline, and the fine print sophisticated readers expect.

Snapshot: Now vs. 2027

Timeline: What’s Investable When

• 2025–2026: Invest in QOZ 1.0 tracts only. Deferral ends 12/31/2026; no new 5/7-year step-ups. The 10-year appreciation exclusion still runs to 12/31/2047.
• 2027–2028 (two-year bridge): Invest in both 1.0 and 2.0 tracts. Dollars invested in 1.0 during 2027–2028 receive 2.0 treatment (rolling 5-year deferral + step-up; 30% via QROF).
• 2029+: QOZ 2.0 only.

Refresher: How QOFs Work

Investors roll capital gains into a Qualified Opportunity Fund (QOF) within 180 days. The QOF deploys ≥90% of assets into qualifying property or businesses inside the zones. Investors get timing benefits on the rolled gain and, after a 10-year hold, an exclusion of appreciation on the QOF investment itself (subject to the applicable window).

Eligible Gains, in One Glance

Qualify: Capital gains (including section 1231 gains under final regs) invested within 180 days.
Special 180-day clocks:

• Pass-through K-1 gains: investor may start the 180 days on (1) the entity’s gain date, (2) the last day of the entity’s tax year, or (3) the entity return due date (no extensions), typically Mar 15 for calendar-year partnerships.
• REIT/regulated investment company capital-gain dividends: window starts on the distribution date.
• Installment sales: each payment has its own 180-day window.

Do not qualify: Ordinary income.

QOZ 1.0 (through 2026): What Still Works

• Deferral to 12/31/2026. Any rolled gain invested now becomes taxable with your 2026 return.
• The big prize remains: a 10-year hold still unlocks zero tax on QOF appreciation (including depreciation recapture on the QOF asset) if sold by 12/31/2047.
• No new step-ups for 2025–2026 vintages (the 5/7-year step-ups were for pre-2022 dollars).

Planning note: If you triggered gains in 2025 or H1 2026 and want the 10-year exclusion, you can’t "wait for 2027" unless your 180-day window reaches into 2027 (see pass-through timing above).

QOZ 2.0 (from 2027): What Changes

Stricter, smaller map

• Governors nominate a new map (beginning July 1, 2026); Treasury approves.
• Expect ~25% fewer zones.
• Eligibility tightens: generally ≤70% of state/metro median family income or ≥20% poverty.
• No more "adjacent but not low-income" tracts.

Rolling deferral and step-up on the rolled gain

• Invest gains within 180 days; deferral runs five years from the investment date.
• At five years, investors receive a 10% basis step-up against the deferred gain (i.e., 10% of the deferred gain never becomes taxable).
• QROF rural boost: the step-up is 30% at five years. Rural "substantial improvement" threshold is 50% of basis (non-rural remains 100%).

10-year exclusion on the QOF investment (appreciation)

• Still available after a 10-year hold, but under 2.0 the exclusion window ends at year 30 of ownership. Appreciation after year 30 is taxable to the extent it exceeds the FMV at the 30-year anniversary.
• Contrast: 1.0 allowed exclusion through 12/31/2047.

Fund reporting and penalties

• From 2027, QOFs file expanded annual reports: asset values, tract IDs, NAICS codes, investment amounts, leased/owned splits, residential units, FTEs, and investor dispositions (with statements to investors about their reporting).
• Penalties increase (with higher caps for funds >$10 million).

Operating Biz Inside the Zone (QOZB Cheatsheet)

Most serious projects run through a QOZ business (QOZB) owned by the QOF. Expect two layers of testing:

• QOF 90% test: the fund must hold ≥90% QOZ property.
• QOZB tests (subsidiary level): commonly
  • 70% of tangible property in the zone
  • 50% gross-income test (from the active conduct in the zone)
  • 40% intangible-use test in the zone
  • Working-capital safe harbor with a written plan (generally ~31–62 months)
  • Sin-business limits (e.g., golf courses, casinos, etc.)

Including this framework in diligence memos saves everyone time.

Related-Party & Improvement Traps (Avoidable With Modeling)

• Original use vs substantial improvement: new property clears “original use”; used property must be substantially improved (additions exceed basis) — 100% in non-rural zones; 50% in rural QROF projects under 2.0. Land must be actively used; it’s not "improved" by itself.
• Related parties: strict limits on buying/leasing/recycling assets from related parties. Always model before assuming compliance.

Exit Execution (How You Actually Claim the Exclusion)

• The 10-year exclusion is typically taken via a basis step-up election on exit of the QOF interest.
• The multi-asset election can facilitate piecemeal exits inside the fund.
• Coordinate K-1 reporting and state treatment at exit; they can differ from federal.

State Conformity: Do Not Assume Federal = State

Some states do not conform (or only partially conform) to OZ benefits. Expect add-backs, basis differences, and timing mismatches in non-conforming jurisdictions. Model state impacts alongside federal treatment before committing.

Strategy Notes (So This Actually Pencils)

• Map the gain and the window. Identify the gain date, character, and your 180-day deadline (especially for K-1s).
• Choose your vintage:
  • Need the 10-year exclusion on 2025–H1 2026 gains and your 180-day window doesn’t reach 2027? You’re in 1.0; plan for the 2026 cash tax on the deferred gain.
  • Otherwise, staging for early 2027 is often superior: rolling 5-year deferral + step-up, with both 1.0 and 2.0 maps available in 2027–2028.
• Underwrite the fund, not the brochure. Confirm 90% testing, QOZB compliance, improvement plans, rural eligibility (if QROF), job/unit creation, and an exit plan within the 30-year cap.
• Documentation: keep subscription timing aligned to the gain; the new reporting regime increases audit clarity.

Bottom Line

OBBBA didn’t just "rescue" Opportunity Zones; it reset them. Many investors will wait for 2027 to capture the rolling five-year deferral and step-up, with the bonus that legacy 1.0 tracts remain investable in 2027–2028 under 2.0 rules. If you’ve already triggered gains, use the 180-day elections wisely so you don’t miss the exclusion while waiting for better terms.

This article is general information, not tax or investment advice. We model gain windows, compare QOF/QROF structures, and coordinate with managers so the cash-tax math and exits line up with reality.