You may be seeing the term “Opportunity Zone” in the news these days. What is that exactly, you might ask? Good question.

Opportunity Zones (OZ) are a federal economic development tax incentive — and right now we are in the middle of a major transition with potential for rural development. Created in the 2017 Tax Cuts and Jobs Act, OZs let investors defer and reduce capital gains taxes by reinvesting into Qualified Opportunity Funds (QOFs) which fund projects in designated low-income census tracks. It is similar to other tax credit programs but relies on private capital rather than federal subsidies.

OZ 2.0 on the Horizon

Congress made Opportunity Zones a permanent fixture of the tax code starting 1 January 2027, with a redesignation cycle every 10 years going forward. Now, new legislation has tightened eligibility to focus benefits for Opportunity Zones 2.0 — a rolling five-year tax deferral plus a standard 10% basis step-up. In a standard fund, investors pay tax on only 90% of the original gain, with the deferral acting like a five-year interest-free loan from the IRS.

OZ 2.0 now features a big rural upgrade. A new category, Qualified Rural Opportunity Funds (QROFs) get a 30% basis step-up and a “substantial improvement” test cut in half. In a rural fund, you only pay tax on 70% of the original gain. And where an investment in an urban tract requires a QOF to make improvements equal to at least the current property value, a QROF only needs to increase the property’s basis by 50%. This is a real benefit where rural property values tend to be lower and there are practical limits on assessed values for small town property.

Then for the real prize: whatever your invested money earns while it is in a qualified fund, those earnings grow completely tax-free if you hold the investment for at least 10 years.

Watch the Map Now

I will leave the math to the accountants, but now is the time to check the map. In every state in the US, the governor was given through the end of September to nominate up to 25% of eligible tracts for OZ 2.0, with a one-month extension if necessary.

Some states, like Nebraska, have published their nominated OZ 2.0 census tracts. Idaho’s list was the first one approved.

Commentators are a bit concerned that not all states are being so transparent about the nomination and designation process. As well, across the dozen states which have published their nominated tract lists as of now, only about 1/3 of nominations are for rural tracts, down from about 45% for OZ 1.0. I sort of understand that trend. The first-round OZ program was complicated enough, we didn’t really understand how it worked in rural jurisdictions I worked with until the program benefits had mostly run their course.

Kudos, though, to Nebraska and Kansas for nominating even more rural OZ tracts this year than for the first round.

The good news is we have time to prepare for OZ 2.0. So, check the eligible tracts map. Check in with your local, regional, or state economic development staff to find out more about your state’s nomination status. Then if your community has a spot on the map, get a head start on preparing for go-day. January First is right around the corner.

Resources

If you want to learn more, there are several resources out there, starting with the US Department of Housing and Urban Development (HUD). A couple of sites I watch include OpportunityZones.com and Rural Opportunity Zones 2.0.

Also, check out the CDFA Opportunity Zone Resource Hub: https://www.cdfa.net/p/OZ-Hub.html.

Do you have questions about Opportunity Zones in your community? Drop me a line and we’ll see what we can figure out.

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