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In the U.S., the fiscal reconciliation bill known as the One Big Beautiful Bill Act (OBBBA) that was signed into law on July 4, 2025, permanently extended and made significant changes to the federal Opportunity Zone (OZ) program. OZ 2.0 opens doors for states, cities, counties, and regions to maximize the impact of this significant tool to invest in economic growth, housing, commercial development, and local businesses.
Originally authorized in 2017, the OZ program has resulted in over $40 billion in equity raised, with more than $100 billion invested in qualified opportunity zones (QOZs) across the U.S.1 Now that we know what the revamped OZ program will look like moving forward, government entities, economic development agencies, and financial institutions should start laying the groundwork for making the most of this massive opportunity.
Why Opportunity Zones were created
In accordance with provisions of the Tax Cuts and Jobs Act in December 2017, Congress created the OZ program to spur economic development and job creation in distressed communities. States and territories could nominate eligible low-income Census tracts (along with a smaller number of tracts contiguous to them that met specified criteria), which were then certified by the Internal Revenue Service (IRS) to become QOZs. States and territories were permitted to nominate up to 25% of all eligible tracts, with Puerto Rico allowed to nominate all of its low-income Census tracts.2 There are now 8,764 QOZs—many of which have experienced a lack of investment for decades, according to the U.S. Department of Housing and Urban Development (HUD)3—spread across all 50 states, Washington, D.C., and five U.S. territories.4
Under the original program, the IRS allowed Qualified Opportunity Funds (QOFs) to raise capital from investors in exchange for tax benefits. Partnerships and corporations could apply to form a QOF as an investment vehicle organized for the purpose of investing in QOZ property. A QOF had to invest at least 90% of the aggregate basis of its assets in eligible OZ assets, property, or partnerships. Some of the more than 7,800 resulting QOFs are national, while others are specific to a state, region, city, or community.5 Many of them focus on particular types of assets, such as multifamily, commercial, industrial, self-storage, renewable energy, senior housing, student housing, operating businesses, or hospitality-related property.6
The original program offered investors the opportunity to invest capital in QOFs in exchange for deferring tax on an equal amount of eligible capital gains. The deferral would last until December 31, 2026, or until the QOF was sold or exchanged, whichever came first. The IRS provided a 10% exclusion on deferred capital gains after five years for investments made by 2021, and a 15% exclusion after seven years for investments made by 2019. Investors who held their QOF investment for at least 10 years would be eligible for a basis adjustment so that any investment appreciation would never be taxed.7
By the end of 2020, OZ investment had flowed into every state. And by the end of 2022, 66% of QOZs had received investment funds—an achievement that the Urban Institute called “an impressive penetration rate for a federal place-based program.”8
Because reporting from the original OZ program was limited, much less data was available on the program’s impact compared with other federal tax incentive programs such as the New Markets Tax Credit. Some encouraging data showed that tracts receiving investments demonstrated higher need than the average of all Census tracts. Across that group, median income was about 60% of the average; home prices were about 72% of the average; and the unemployment rate was about 3% higher.9
Yet available data also indicated that the program tended to “attract more investment in areas with higher preexisting private investment, often located in prosperous counties and high-growth regions,” according to one report.10 This led to calls for program changes as Congress considered its inclusion in legislation in early 2025.
The initial OZ program was due to sunset at the end of 2026. OBBBA has permanently extended it and made substantial changes focused on expanding greater program access for lower-income communities and rural communities; providing more data for understanding program impacts; and making the tax benefits more uniform over the life of the program. The changes include:
A reopened process for new QOZ designations. Starting July 1, 2026, U.S. state governors may designate new QOZ Census tracts every 10 years, conditioned upon Treasury certification. The first set of QOZ designations will be implemented on January 1, 2027, when the new tax benefits under OZ 2.0 will take effect.
New eligibility criteria for Census tracts. To qualify as a QOZ, the tract must have either a poverty rate of 20% or higher, or a median family income not to exceed 70% of the applicable state or metropolitan area median. This median family income threshold for designating low-income Census tracts was reduced from 80% to 70% in OZ 2.0.
This change will result in an estimated 19.5% reduction in the eligible number of tracts, and those eligible tracts are generally lower income.11 Higher-income tracts that are contiguous to low-income tracts will no longer be eligible. And Census tracts with poverty rates of 20% or higher can now qualify only if the median family income is 125% of AMI or lower. This change was intended to close a loophole where higher-income tracts could technically qualify based on their poverty level. Also, the blanket QOZ designation for all low-income communities in Puerto Rico was eliminated.
New provisions to benefit rural communities. The legislation created a new category of QOFs for rural investments. Qualified Rural Opportunity Funds (QROFs) are required to hold 90% of their assets in rural QOZ properties or businesses. QROFs are eligible for a 30% basis step-up after five years—a benefit not provided to non-rural QOFs, which instead receive a 10% basis step-up.
In addition, QROF properties receive favorable treatment in the Substantial Improvement Test. For most QOZ properties, QOFs have 30 months to double the adjusted basis, under the Substantial Improvement Test. But under the new provisions, QROFs only need to increase the adjusted basis by 50% during that same period.
Revised investor benefits. Tax benefits under the original OZ program had three tiers, and the benefits diminished the later one invested in a QOF. Under OZ 2.0, investors will receive the same tax benefits no matter when they invest in a QOF, with rolling five-year deferrals providing a 10% step-up in basis.
Expanded reporting requirements. The original OZ program had limited reporting requirements. Under OZ 2.0, the U.S. Department of the Treasury will issue annual reports that include amounts invested in QOZs, percentage of eligible Census tracts receiving investment, number of employees in QOF-financed businesses, number of residential units created, and other information.
Beginning in 2031, Treasury will provide semi-decennial reports to track economic and social impacts on unemployment, job creation, poverty reduction, and other aspects.
While key OZ program provisions have changed, the primary constant is that states, regions, counties, cities, developers and businesses in QOZs compete for capital. Getting the most out of this program means deliberate planning, strategy, and proactive incentivizing and marketing. Regions with weaker real estate markets, lower growth, or slower rates of appreciation may need the investment the most—but they can still have a harder time attracting it without a sound strategy in place.
According to the Urban Institute, during the first iteration of the program, more OZ investment went to zones with higher incomes and educational attainment, which usually correlates to areas with higher potential for appreciation.12
The lower median income cap, new QROF incentives, and other changes may help incentivize investment in areas with higher need. But QOZs with stronger real estate and business upside may continue to appear more attractive to investors.
While the OZ program provides an opportunity to jumpstart economic development projects, source gap financing for affordable housing, and invest in local business growth, funds won’t automatically flow to an area just because it has a QOZ. During the original program, governments and regional entities used a variety of strategies to attract capital, including:
The key for public-sector entities is to develop a reputation as a QOZ-friendly place to invest. Weaker markets may need to overcome structural disadvantages by focusing on ease of development, providing access to financing products and technical assistance. And in a crowded field, regions that are bullish on OZ need to be visible and differentiate themselves.
A variety of financial institutions have already been involved in QOZ transactions, either by managing a QOF or investing in other types of debt or equity. The original OZ program offered them a limited-term opportunity with diminishing benefits as time went on. There was also no guarantee that the program would be extended. For that reason, many financial institutions that didn’t manage QOFs treated OZ transactions as one-off deals instead of developing formal products that were custom-designed to work within OZ capital stacks or fill gaps. Others that evaluated setting up a QOF may have ultimately opted out due to the program’s limited-term nature.
Financial institutions now have the opportunity to invest in product design, analyze deal structures more fully, and create a robust ecosystem of products targeted at making OZ transactions work efficiently in a variety of contexts. With projects ranging greatly by asset class, geography, and scale, this diversity of opportunities will require an array of national and regional banks, community development financial institutions, and private equity to maximize its potential.
OZ 2.0 gives financial institutions the opportunity to:
For QOFs, the key is to instill confidence in investors by demonstrating stable deal flow, a strong track record, and capable management. They can also attract investors through differentiation by focusing on specific asset types, regions, or social/economic development objectives.
These OZ program changes present great promise for attracting capital to communities that need investment. It’s now up to each state, region, city, and county to mobilize and demonstrate their attractiveness as a place to invest. To maximize program impact, investors must learn from the original program and create a framework for efficient capital placement and predictable capital stacks.
New reporting data will allow better understanding of the program’s effects on producing housing, jobs, and economic opportunity. It’s up to the ecosystem of players involved to advance the program’s full impact and success—and that means preparing now so that they can hit the ground running.
Gregory Heller, Partner
Raquel Malmberg, Partner
Carly Mitchell, Partner
Guidehouse is a global AI-led professional services firm delivering advisory, technology, and managed services to the commercial and government sectors. With an integrated business technology approach, Guidehouse drives efficiency and resilience in the healthcare, financial services, energy, infrastructure, and national security markets.