Opportunity Zones 2.0: New Rules, New Incentives and What Comes Next

Opportunity Zone Program Overview 

The Opportunity Zone program is a federal initiative designed to encourage economic development through long-term private investment in low-income urban and rural communities. Originally enacted as part of the Tax Cuts and Jobs Act of 2017, the program allows taxpayers to defer and potentially reduce taxes on capital gains by reinvesting those gains into qualifying projects located in designated Opportunity Zones.

Updated Eligibility and Incentives

In addition to making the Opportunity Zone program permanent, the updated law requires Opportunity Zones to be redesignated every 10 years.

At this stage, state governors have until September 30^th (or October 31^st if an extension is requested) to submit final nominations of eligible low-income census tracts for Opportunity Zone designation to the U.S. Treasury. Newly designated Opportunity Zones go into effect and will remain in effect until December 31, 2036.

Federal law limits the number of tracts that may be nominated to no more than 25% of the state's eligible low-income census tracts. As a result, not every qualifying tract will receive an Opportunity Zone designation.  Further, not all currently designated Opportunity Zones will meet the updated criteria, which refocus the program on low‑income and more economically distressed areas. A low‑income community now includes a census tract that meets either: (a) a median family income below 70% of the applicable state or metropolitan median; or (b) a poverty rate of at least 20% and a median family income below 125% of the applicable median. The Act also eliminates the “contiguous tracts” exception, which allowed governors to nominate tracts that were adjacent to eligible low-income census tracts that would otherwise not qualify. 
 
The legislation modifies the tax incentives available to investors and enhances incentives for investments in rural Opportunity Zones. New investments may qualify for the following:
a rolling five-year gain deferral period beginning on the investment date, rather than the prior fixed recognition date structure under Opportunity Zones 1.0, and a 10% basis increase after a five-year holding period, replacing Opportunity Zones 1.0’s 10% step up after a five-year holding period plus an additional 5% basis increase after a seven-year holding period. For qualifying rural investments, the basis step-up increases from 10% to 30%, reducing the amount of deferred gain ultimately subject to tax. In addition, the legislation reduces the substantial improvement threshold for qualifying projects in rural Opportunity Zones from 100% to 50%, making it easier for certain real estate developments to qualify for the program's tax advantages. For purposes of these enhanced incentives, “rural” is defined as any area other than: (a) a city or town with a population greater than 50,000; and (b) an urbanized area adjacent to a city or town with a population greater than 50,000.
 
If an investment in an Opportunity Zone is held for at least 10 years, post-investment appreciation would not be included in taxable gain following disposition of the investment due to the tax basis stepping up to current market value; however, if the investment is held for than 30 years, the tax basis steps up at that point, and any additional gain will be subject to federal income tax. In addition, if the Opportunity Zone investment is held for greater than 10 years, and the basis is stepped up to fair market value as described above, any depreciation recapture may be excluded from federal income tax.
 

Participation Requirements for Business and Investors

Businesses and investors considering Opportunity Zone investments should evaluate qualification requirements early in the planning process. Generally, qualifying Opportunity Zone businesses must maintain a substantial connection to the designated zone, including requirements relating to the location of business property, income generation, and business operations.

Investors typically participate through Qualified Opportunity Funds, which are investment vehicles organized as partnerships, corporations or LLCs (treated as partnerships or corporations for tax purposes) that deploy capital into qualifying Opportunity Zone property or businesses. To obtain the program's benefits, investors must generally reinvest eligible capital gains within 180 days, and the fund must satisfy ongoing asset-investment requirements. Because the greatest tax benefits are tied to long-term holdings, investors should carefully evaluate investment horizons, liquidity considerations, and exit strategies before committing capital.

Takeaways

The redesignation process presents a significant opportunity for long-term private investment. While state governments continue to evaluate eligible census tracts and prepare submissions, developers, businesses, and investors should assess whether planned projects may benefit from the revised Opportunity Zone framework.

As the nomination process unfolds and additional guidance becomes available, stakeholders should closely monitor developments to identify opportunities and ensure compliance with evolving program requirements.

For more information on how you can take advantage of Opportunity Zone tax incentives, please contact Jonathan Moon, Mallory Vincelli or a member of Haynsworth Sinkler Boyd’s economic development or tax practice groups.

Resources

North Carolina Opportunity Zone Program Information
South Carolina Opportunity Zone Program Information