What you need to know about the future of Opportunity Zones

Opportunity Zones (OZs) were established to spur long-term investment in economically distressed communities. Here, we explain how the program works, its benefits, and the latest updates from proposed legislation in 2025.

Understanding Opportunity Zones

What are Opportunity Zones?

Opportunity Zones are economically distressed census tracts designated by state governors and certified by the U.S. Department of the Treasury. They were created under the 2017 Tax Cuts and Jobs Act (TCJA) to incentivize investment in underserved areas.

How are Opportunity Zones selected?

Governors nominated up to 25 percent of eligible low-income census tracts based on economic indicators like poverty and income levels. These were then certified by the U.S. Treasury and retain their OZ designation through the duration of the program.

What is the latest proposed legislation affecting OZs?

In July 2025, the Congress passed a sweeping reconciliation bill nicknamed “One Big, Beautiful Bill” that includes major updates to the OZ program:

• Permanent status: Expands Opportunity Zone policy to become a standing component of the Internal Revenue Code.
• Inclusion of rural areas: Broadens eligibility criteria to promote rural development. Rural zones will now receive triple the benefit in capital gains discounts than other Opportunity Zones. Rural projects will now qualify for incentives with lower thresholds for investments in the existing structure.
• Streamlined tax benefits: Simplifies basis increase rules and adds new rural incentives. This includes preserving the tax-free exit after a 10-year holding period, and removing the 2047 cutoff.
• Improvement standards: Requires substantial upgrades in rural zone investments, and eases the “substantial improvement test” simplifying rehabilitation projects in rural areas.
• Mandatory reporting: Reintroduces annual compliance reporting and penalties for reporting failures for Qualified Opportunity Funds (QOFs) and businesses. This includes annual reporting on project location, business type, and job creation.

These changes institutionalized Opportunity Zones as a long-term economic tool—but with tighter targeting, rural incentives, and better oversight. Key dates to note:

• Dec 31, 2026: Last chance for investments under the old provisions.
• Jan 1, 2027: New cycle begins with the re-designated zones and revised tax structure.

Additionally, the Road to Housing Act is currently making its way through Congress, with the Senate Banking, Housing, and Urban Affairs Committee passing it on July 29th. This bill is the first markup of a housing package in almost a decade and will contain additional Opportunity Zone provisions. These provisions include:

• Priority Applications: HUD would prioritize applicants that are based in or primarily serve communities designated as Opportunity Zones for any competitive grants relating to housing development or preservation.
• Creating More Housing: This legislation would also create a pilot grant program to help local governments convert vacant commercial or industrial buildings into affordable housing.

These recent legislative provisions are two of the most comprehensive pieces of housing legislation since the Great Recession.

What types of investments qualify?

Eligible investments include:

• Substantial improvement or development of tangible property in OZs
• Investment in new construction
• Equity in qualified OZ businesses that meet specific income, use, and location tests

Do OZ investments apply only to real estate?

No. While real estate accounted for 68% of OZ investments, OZs also support operating businesses located in designated zones, provided they meet active business and use-of-property requirements.

Current tax benefits and deadlines

What are the current tax benefits of investing in opportunity zones?

There are three main benefits:

1. Deferral of capital gains on prior investments until December 31, 2026
2. Reduction of deferred gains through basis step-ups (if held for 5 or 7 years, for investments made before certain dates)
3. Exclusion of new gains from OZ investments held for at least 10 years

What is a Qualified Opportunity Fund (QOF)?

A QOF is an investment vehicle, organized as a corporation or partnership, that deploys capital into eligible OZ projects. Capital gains must be reinvested in a QOF within 180 days of the gain event to qualify for tax benefits.

What are the key investment deadlines, and when are taxes ultimately due?

• 180 days to invest realized capital gains into a QOF
• December 31, 2026: Final deadline to defer gains from previous investments
• 10-year hold: Required to eliminate tax on appreciation from OZ investment
• Taxes on deferred gains are due in 2026 or earlier if the QOF investment is sold

Can I reinvest returns from a QOF into another OZ project?

Proceeds from the sale of OZ assets within a QOF may be reinvested into another OZ property within 12 months to maintain compliance. However, this does not reset the original 10-year holding period for capital gains exclusion.

Investing wisely

What due diligence is required to invest in a QOF?

Before investing, it’s important to:

• Confirm the QOF meets IRS compliance standards
• Understand the project’s business model and financials
• Evaluate the fund’s management, fees, and governance
• Consult legal and tax advisors to ensure full regulatory compliance

How do I select the best projects within Opportunity Zones?

Look for:

• Strong location fundamentals
• Zoning and permitting readiness
• Community support or local partnerships
• Clear long-term value and exit strategy
• Experienced, transparent sponsors

How can I balance financial and social returns in OZ investments?

• Set measurable impact goals alongside ROI targets
• Use third-party reporting to track community outcomes
• Invest in projects aligned with local needs
• Engage with local stakeholders to ensure inclusive development

Risk and impact

Do Opportunity Zones raise the risk of gentrification?

They can. Without careful planning, OZ investment can lead to rising rents and displacement. To mitigate this:

• Prioritize mixed-income and affordable housing
• Partner with mission-aligned developers
• Build safeguards into projects to ensure inclusive outcomes

What are common misconceptions about Opportunity Zones?

Myth: OZ projects must be massive.
Fact: Projects of all sizes are eligible, including smaller-scale developments and businesses.

Myth: OZ investing is too complex.
Fact: With experienced advisors, compliance and strategy can be managed efficiently.

Myth: OZs don’t deliver community benefit.
Fact: Evidence shows that, when executed thoughtfully, OZs support housing, job creation, and infrastructure in underserved areas.

How does OZ reporting and compliance work?

Pending legislation would require:

• Annual reporting from QOFs and OZ businesses
• Disclosure of investment amounts, project types, and community outcomes
• Penalties for noncompliance

While not included in the original TCJA due to Senate rules, bipartisan support suggests transparency measures are increasingly likely.

Navigate OZ investments with confidence

As Opportunity Zone legislation evolves and new incentives emerge, understanding the rules, timelines, and investment strategies is more crucial than ever. Whether you're exploring your first OZ project or managing a complex portfolio, the right guidance can make all the difference.

To navigate the shifting landscape and unlock the full potential of OZ investing, connect with the experts at Walker & Dunlop. Our team brings deep experience in tax-advantaged financing, community-focused development, and capital markets strategy. We are here to help you align financial goals with lasting impact. Reach out today to start a conversation.

Special thanks to Ken Buchannan for contributing to this article.