The Emerald City of Investment: Congress Charts a New Course for Opportunity Zones

Both the Houseand Senate bills include provisions for Permanent Renewal and Enhancement of Opportunity Zones (“OZ 2.0”). In these proposals, congressional leaders do not merely adjust the Opportunity Zone (“OZ”) program but reimagine it, offering a sweeping overhaul designed to revitalize the original program. Both chambers would sunset existing OZ and introduce a bold new chapter rooted in targeted investment, equity and community transformation.

While the House proposal shortens the current opportunity zone designation to December 31, 2026, and provides for an additional OZ investment to be designated from January 1, 2028 through December 31, 2033, the Senate bill would not adjust the current OZ program and would provide for a rolling 10-year OZ designation beginning on January 1, 2027, making QOZ investment opportunities permanent.

Under the new OZ program, both the House and Senate bills would limit the criteria for low-income communities, only allowing areas with a statewide median income of 70% or less (previously 80% or less) to be eligible for OZ designation. This would also apply to OZ contiguous communities. Both bills generally authorize the Secretary of the Treasury to designate 25% of low-income communities in each state.

Both the House and Senate emphasize rural investment, requiring that of the low-income communities identified, at least one-third of low-income designated zones (meeting the lower income thresholds discussed above) be in rural areas. Importantly, rural contiguous tracts will not be eligible for designation. While governors hold the authority to select eligible tracts, the process will remain under federal oversight with limitations on the total number of zones that can be approved nationwide.

Under the existing OZ structure, investors who hold the Opportunity Fund investment for five years as of December 31, 2026, are able to decrease recognized gain by 10% due to an increase in basis, or if held for seven years, receive a decrease recognized gain by 15%.

The House proposal regarding OZ 2.0 simplifies the previous multi-tier basis step-up structure by replacing the former 10% and 15% increases with a single, streamlined 10% basis step-up for investments held for five years. However, the Senate bill would provide the 10% increased basis adjustment throughout the holding period, in allowing a 1% basis increase in Year 1, 2, and 3, a 2% basis increase in Year 4 and 5, and a final year basis increase of 3% in Year 6.

To encourage greater investment in rural communities, the House and Senate bills provide that Qualified Rural Opportunity Funds (“QROFs”) will benefit from enhanced incentives, including a 30% basis increase, or three times greater than a regular OZ investment. The House would require the QROF to be held for five years prior to getting the 30% increase, while the Senate bill would spread the 30% increase in basis as follows: 3% increase in years 1, 2 and 3, 6% increase in years 4 and 5 and a 9% increase in year 6.

Additionally, the substantial improvement requirement for rural property has been relaxed from 100% to just 50% of the building’s original basis, making it significantly easier to qualify. This adjustment is particularly meaningful for multi-family and light commercial redevelopment projects, where the high cost of capital expenditure requirements has often been a barrier to revitalization of these areas.

The House bill would allow a deferral offer up to $10,000 of ordinary income by investing in Qualified Opportunity Funds (“QOFs”), thereby broadening access for wage earners and middle-income participants. Although these ordinary income investments are not eligible for the 5-year, 10% basis step-up, they still qualify for full federal tax exemption on gains realized after a 10-year holding period is satisfied, offering a powerful incentive for long-term investment. The Senate Finance Committee does not include this provision in its proposal.

Under OZ 2.0, the capital gains deferral window has been extended, providing greater flexibility for investors and fund managers. While gains eligible under the original OZ program must still be recognized by December 31, 2026, the updated program allows capital gains reinvested between 2027 and 2033 into newly designated zones to be deferred until December 31, 2033. This expanded window offers strategic planning opportunities and smoother transitions between the original and new designation periods, ensuring continued momentum for long-term, impact-driven investment.

With the original OZ census tracts set to expire on December 31, 2026 (unless renewed or extended), investors face a narrowing window to take advantage of existing designations. Transition provisions may apply for ongoing investments, but the sunset date underscores the urgency to act. Under the evolving OZ 2.0 program, QOFs and Qualified Opportunity Zone Businesses will be subject to significantly strengthened reporting and compliance measures. These include enhanced disclosures on social and economic impacts, mandatory electronic filings, annual reporting and beneficiary impact assessments. Noncompliance could trigger substantial penalties, disqualification or increased audit risk, signaling a sharp pivot toward transparency and accountability.

In response, the Senate Bill’s proposed Section 1400Z-2(a)(2)(B) would be amended to accommodate distinct election treatments for investments made before and after this cutoff. This dual-election framework enables investors to structure contributions strategically across both designation periods, which is particularly important for tiered or staggered investment approaches aimed at maximizing tax advantages under each regime.

Much like Dorothy’s journey down the yellow brick road, the next chapter of the OZ initiative leads us toward a renewed vision, one rooted in clarity, purpose and the promise of the Emerald City of economic opportunity. With a sharpened focus on underserved rural census tracts, both the Senate and House proposals provide a revised program, including a reinstated 10% basis step-up and enhanced disclosure requirements. By narrowing eligibility and recalibrating incentives, the proposal aims to return to the program’s original intent of targeting the underserved communities that need it most and empowering investors to help them thrive.