Opportunity Zones Are Here to Stay: What CRE Investors Need to Do Before 2027

In a win for commercial real estate investors, fund sponsors and developers, the One Big Beautiful Bill Act (OBBBA) permanently extended and modernized the Qualified Opportunity Zone (QOZ) program. The law transformed a time-limited incentive into a durable, long-term feature of the Internal Revenue Code, opening a new planning window for capital deployment in designated communities.

Three Things CRE Investors Need to Know

1. 1. The Opportunity Zone program is now permanent, but the rules are changing. Starting in 2027, OZ 2.0 replaces key elements of the original framework, including a rolling five-year gain deferral period and new zone designation criteria.
   2. The next two years serve as a critical planning window. Investors should review current acquisition, development and expansion plans before Dec. 31, 2026, while monitoring which existing Opportunity Zones will remain eligible under the new designation process.
   3. Rural investments and compliance deserve special attention. Rural Opportunity Zone projects may qualify for enhanced tax benefits, while all funds and sponsors face expanded reporting requirements and penalties for noncompliance.

The Prior Framework: OZ 1.0

The QOZ program was originally enacted as part of the Tax Cuts and Jobs Act of 2017 (TCJA). Under prior law, investors could defer capital gains taxes by reinvesting realized gains into Qualified Opportunity Funds (QOFs) within 180 days of the triggering event.

Investments held at least five years qualified for a 10% basis step-up, and certain earlier investments could qualify for an additional 5% basis step-up after seven years, resulting in a maximum 15% basis increase.

Investments held at least 10 years were generally eligible for permanent exclusion of post-investment appreciation through a fair-market-value basis election upon disposition.

Under OZ 1.0, state governors (or equivalent chief executives) nominated eligible low-income census tracts, subject to a cap of 25% of a state’s low-income communities. The treasury secretary certified those nominations.

This process resulted in 8,764 designated communities across all 50 states, the District of Columbia, and five U.S. territories.

OZ 1.0 had a built-in sunset. The gain-deferral benefit ended no later than Dec. 31, 2026, regardless of holding period, meaning deferred gains became taxable at that time even if the QOF investment was retained.

The underlying census tract designations were set to expire on Dec. 31, 2028. Without congressional action, the program would have effectively closed to new investment after 2026, even though existing investors could continue to benefit from the long-term appreciation exclusion rules.

What OBBBA Changes: OZ 2.0

For investments made after Dec. 31, 2026, the OBBBA fundamentally restructures the opportunity zone incentive:

• • Permanence. The QOZ program no longer carries a sunset date. It is now a permanent part of the Internal Revenue Code.
  • Re-Designation Timeline. Zones must be re-designated every 10 years. The first OZ 2.0 designation cycle begins with governor nominations starting July 1, 2026. The first round of new designations becomes effective Jan. 1, 2027. Existing OZ 1.0 tracts generally remain in effect through Dec. 31, 2028, creating a two-year transition period during which both OZ 1.0 and OZ 2.0 zones are simultaneously in effect.
  • Tighter Eligibility. The OBBBA narrows the universe of eligible census tracts. Census tracts now qualify only if they meet one of these sets of criteria:
    • • Median family income does not exceed 70% of the applicable area or state median income (reduced from the prior 80% threshold)
      • Poverty rate is at least 20% and median family income does not exceed 125% of the applicable area’s median income

The prior contiguous-tract designation rules under OZ 1.0 have been eliminated entirely. As a result, fewer census tracts are expected to qualify under OZ 2.0.

• • Rolling Five-Year Deferral. The fixed Dec. 31, 2026, gain-recognition date is replaced with a rolling five-year deferral period. For post-2026 investments, deferred gain generally is recognized on the date of disposition, another inclusion event, or the fifth anniversary of the investment, whichever is earliest.

Unlike OZ 1.0, where all deferred gain became taxable on the same date regardless of when the investment was made, OZ 2.0 provides each qualifying investment its own five-year deferral period.

This change allows investors to defer gain for a full five-year period, regardless of when the qualifying investment is made, making the Opportunity Zone incentive more useful for future business sales, real estate dispositions, and other liquidity events that occur well after 2026.

• • Revised Basis Step-Up. A qualifying QOF investment held for at least five years generally receives a 10% basis increase, effectively excluding 10% of the originally deferred gain from taxation. The additional 5% basis increase available under OZ 1.0 has been eliminated.

• • Enhanced Rural Incentive. The OBBBA creates Qualified Rural Opportunity Funds (QROFs) and Qualified Rural Opportunity Zone Businesses (QROZBs). Unlike standard QOF investments, qualifying QROF investments receive a 30% basis increase after five years.

In addition, qualifying rural property benefits from a reduced substantial improvement requirement. QROFs require a reinvestment of only 50% of adjusted basis, rather than 100%.

• • Long-Term Gain Exclusion Preserved. The Opportunity Zone program's most significant benefit, the exclusion of post-investment appreciation after a long-term holding period, remains intact.

For qualifying investments held at least 10 years, investors may continue to eliminate federal tax on appreciation generated within the investment.

However, the prior fixed 2047 outer deadline is replaced with a rolling 30-year framework for post-2026 investments. If an investment is held beyond 30 years, the fair market value basis adjustment is generally capped at the investment’s value on its 30th anniversary.

Enhanced Compliance and Reporting

The OBBBA significantly expands reporting obligations for Opportunity Zone funds.

QOFs must now provide enhanced annual disclosures regarding their assets, investment locations, housing and employment metrics, and certain investor disposition information. QOFs must continue filing Forms 8996 and 8997, and investors must continue reporting deferral elections and inclusion events on Form 8949.

Failure to file complete and accurate reports may result in penalties of $500 per day, generally capped at $10,000 for most funds. Larger funds face substantially higher penalty limitations, and materially increased penalties may apply in cases involving intentional disregard of reporting requirements. The legislation also imposes new periodic reporting obligations on the U.S. Treasury designed to measure the program's effectiveness.

A Florida Focus

 Florida currently has 427 designated Opportunity Zones under OZ 1.0, including 99 rural OZ tracts, with at least one zone in every Florida county. Florida Commerce is actively preparing for the OZ 2.0 nomination process, with governor zone nominations to the U.S. Treasury beginning July 1.

Current commentary anticipates new OZ 2.0 zones in parts of Central Florida outside major metros, the Lake Okeechobee region, and the Panhandle. Investors and developers with projects in these regions should monitor the designation process closely and engage early with local economic development organizations.

What This Means for Investors

The transition from OZ 1.0 to OZ 2.0 creates several planning considerations for CRE investors, developers and fund sponsors:

• • OZ 1.0 investments remain grandfathered. Investments made before Jan. 1, 2027 remain governed by the original OZ 1.0 rules. Deferred gain generally must still be recognized on Dec. 31, 2026, subject to any available basis increase, and the resulting mandatory gain inclusion generally may not be re-deferred under the OZ 2.0 regime.

However, the long-term gain exclusion benefit remains available for qualifying investments that satisfy the applicable 10-year holding-period requirements, even after the underlying OZ 1.0 tract designations expire at the end of 2028.

• • During 2027 and 2028, both OZ 1.0 and OZ 2.0 designations may be in effect. Investors should evaluate existing and prospective projects to determine whether a property’s census tract is likely to remain designated under the new eligibility standards, or whether repositioning is warranted.
  • Review current OZ 1.0 acquisition, development and expansion plans before Dec. 31, 2026. IRS Notice 2026-40 provides limited transition relief for certain post-2026 property acquisitions, including projects operating under qualifying working-capital safe-harbor plans.

Projects that appear economically similar may receive different tax treatment depending on when property is acquired and whether applicable transition requirements are satisfied. Early planning may help preserve Opportunity Zone benefits and avoid unintended qualification issues.

• • Timing of future investments matters. The shift from a fixed recognition date to a rolling five-year deferral period fundamentally changes the economics of future Opportunity Zone investments. Investors considering post-2026 QOF investments should evaluate the timing of capital gains, projected holding periods, and anticipated liquidity events.
  • Rural opportunities may offer enhanced returns. The combination of a 30% basis increase and a reduced substantial improvement threshold may cause certain rural projects to produce significantly more favorable after-tax results than comparable non-rural projects.
  • Build reporting infrastructure now. Fund sponsors should begin developing the systems and processes necessary to satisfy the annual disclosure obligations required under OZ 2.0. Early preparation may reduce administrative burden and mitigate future penalty exposure.

The interplay between OZ 1.0 and OZ 2.0 rules, the shifting designation maps, and the new compliance regime create both opportunity and risk. Please contact Kyle Mosey, Logan Golladay, C. Luke Nixon or any member of Phelps' real estate or tax teams if you need guidance.