Our perspective

In light of recent changes introduced by the One Big Beautiful Bill Act (OBBBA) and the accompanying revisions to the Qualified Opportunity Zone (QOZ) provisions, investors intending to pursue QOZ investments may benefit from deferring their participation until 2027 or later, when the newly enacted, more favorable tax treatment becomes effective.

Text of the OBBBA is available here: https://www.congress.gov/ bill/119th-congress/housebill/1/text. We include the relevant section in parentheses where appropriate.

What has changed

OBBBA introduces several significant modifications to the QOZ program. The key provisions related to income tax are outlined below: 

• Deferral period for rolled gains. For investments made on or after January 1, 2027, capital gains reinvested into a Qualified Opportunity Fund (QOF) will be deferred for five years from the date of investment, unless the investment is sold or exchanged earlier (501(a)).

This represents a meaningful shift from the prior rule, which deferred such gains only until December 31, 2026, regardless of when the investment was made.

• Basis step-up for five-year holding. QOZ investments made on or after January 1, 2027, and held for a minimum of five years will receive a basis increase equal to 10% of the deferred gain (502(b)). In effect, this excludes 10% of the original gain from taxation, while the remaining 90% remains deferred for five years. A special provision applies to investments made through Qualified Rural Opportunity Funds (QROFs) that increases the basis step-up to 30% after five years (503(c)).

Under the current rules, although a 10% step-up is theoretically available, the expiration of gain deferral on December 31, 2026, prevents investors from satisfying the five-year holding requirement in time.

• Tax-free appreciation with a 30-year limitation. Investments made on or after January 1, 2027, and held for at least ten years will continue to benefit from full exclusion of post-investment appreciation from federal income tax, as they have under the original QOZ framework. However, OBBBA imposes a new limitation: Any appreciation occurring after the 30th anniversary of the investment will no longer qualify for tax-free treatment and will become taxable upon recognition (504(e)).

An example

Assuming no other influencing factors, consider a taxpayer who rolls $1,000,000 of taxable gains into a Qualified Opportunity Zone investment: 

By postponing a Qualified Opportunity Zone (QOZ) investment until 2027 or later, investors may benefit from both a reduction in the taxable gain through the available basis step-up and an extended deferral period, effectively delaying the associated tax liability by an additional five years.

Next steps

We encourage clients who are interested in QOZ investing to engage with their Pathstone advisor to evaluate how these updates may impact their broader tax and investment strategy. A timely conversation can help assess whether deferring a QOZ investment until 2027 or later may result in more favorable outcomes, including greater tax deferral and potential exclusions through basis step-ups. 

Advisors can also assist in modeling timing scenarios, identifying qualified funds, evaluating rural investment opportunities, and aligning QOZ planning with estate, liquidity, and long-term capital gain objectives. Proactive planning today can help ensure that investors are well-positioned to take full advantage of the new rules when they take effect.