How Opportunity Zone 2.0 Legislation Provides a Much-Needed Upgrade

The latest federal Opportunity Zone (OZ) legislation was passed as part of the One Big Beautiful Bill Act. Signed into law on July 4, 2025 by President Trump, the program is now permanent and makes significant improvements to the original legislation. 

The initial OZ law was passed in 2017 as part of the Tax Cuts and Jobs Act. The aim was to offer tax incentives for private investment in economically distressed areas of the country. Unfortunately, the program struggled to gain broad acceptance for several reasons: 

1. Until the recent new legislation was passed, the program was set to expire in 2026. The looming deadline made it difficult for investors to commit to large-scale, long-term projects.  

2. No standardized reporting or community outcomes were required by Congress, such as number of jobs created, affordable housing units delivered, or small-business growth. Capital often flowed to projects that met the letter of the law but generated little economic benefit.  

3. Many OZ investments occurred in census tracts that were technically eligible for the program but already experiencing gentrification or significant private investment. Developers favored these areas because they offered lower risk and higher returns. As a result, truly distressed communities saw less benefit. 

4. During the program’s early years, the IRS issued key regulations in stages. As a result, real estate investors were uncertain about compliance, reinvestment timing, and eligible property types. Some were hesitant to commit capital to projects until the rules were clarified, slowing deal flow. 

5. The required legal, accounting, and compliance work was often cost-prohibitive for smaller developers or community-based organizations. This severely hampered smaller-scale revitalization efforts. 

Over time, OZs became increasingly labeled as vehicles for wealthy investors to defer or, under certain conditions for new gains generated by OZ investments only, totally eliminate capital gains taxes without delivering any real community benefits. The result was a decline in interest, even if some projects did produce positive local results. A lack of marketing and advertising OZ project successes only worsened the problem. 

The program’s permanence established by the 2025 OZ legislation will hopefully result in wider acceptance. The new law fine-tunes the program to better target local needs and verifies actual outcomes. Investors can now defer capital gains for up to five years on a rolling basis, providing more flexibility. A 10 percent stepped-up basis after five years is carried over from the old law for standard projects, while rural areas will receive an even larger basis increase.  

An example of how stepped-up basis works would be the following: 

• An investor sells stock in 2025 and realizes a $100,000 capital gain. 

• They invest the full $100,000 into a qualifying OZ project. 

• Year 0 (2025): $100,000 of gain is deferred from taxes. 

• Year 5 (2030): The investor qualifies for the 10 percent basis boost. 

• Their basis in the OZ investment increases from $0 to $10,000. 

• Now, only $90,000 of the original gain will be taxed when recognized. 

• If they are in the 20 percent long-term capital gains bracket: 

• Without OZ investment: 20 percent × $100,000 = $20,000 in taxes owed. 

• With OZ investment and the 10 percent step-up: 20 percent × $90,000 = $18,000 in taxes owed. 

• Result: A $2,000 tax savings from the basis boost, plus the benefit of deferring the tax payment for five years. 

Differences for Rural OZs 

About 60 percent of Texas OZs are in rural areas. If the investment is in a qualifying rural OZ, tax savings are significantly larger. Qualified rural opportunity funds earn a 30 percent basis boost and only need to make half the “substantial improvements” previously required to qualify for the program. Here’s an example of how the OZ’s improvement requirement would work before and after the most recent 2025 legislation: 

The change lowers barriers to entry for rural OZ investors, increasing the financial feasibility of adaptive reuse, renovation, and rehabilitation projects. The new incentives should attract more investment in projects such as rural workforce housing, main street revitalization, or light industrial redevelopment. 

What Kinds of Projects Qualify? 

Both residential and commercial real estate developments are eligible for OZ investment. This includes multifamily projects; mixed-use developments combining residential and commercial uses; industrial properties; and commercial retail or office buildings. Raw land is also potentially eligible, but with conditions. To qualify, an investor must either begin by constructing new structures or make substantial improvements to any existing property on that land. 

By tightening eligibility rules, increasing rural benefits, and adding new reporting requirements, the new law is designed to ensure that OZ investments focus on areas where they’re needed most and deliver results that can be measured and disclosed. The incentives and technology are available. But success will depend on buy-in from real estate developers and local governments along with investors willing to think long-term. 

Views expressed on The 338 are those of the authors and do not imply endorsement by the Texas Real Estate Research Center, Division of Research, or Texas A&M University.