Under the One Big Beautiful Bill Act (OBBB), the Opportunity Zone program, now referred to as OZ 2.0, has been significantly revised to emphasize rural investment through the creation of Qualified Rural Opportunity Funds (QROFs). These changes, effective January 1, 2027, introduce enhanced benefits designed to stimulate economic development in America’s rural communities.
This revised framework recognizes rural areas that were often overlooked under the original Opportunity Zone program. OZ 2.0 seeks to correct that imbalance by offering more tax incentives, lowering development barriers and introducing a permanent structure that encourages long‑term capital formation in less densely populated regions.
- New Rural QOF Classification & Eligibility
QROFs must allocate at least 90% of their assets to properties or businesses located in rural Opportunity Zones. These “rural areas” are defined as any locale outside of cities or towns with populations of over 50,000 and not adjacent to urbanized regions.
This high investment requirement ensures that QROFs are designed specifically to support rural growth, rather than spreading investments across many different areas. Investors who want to benefit from QROFs will need to focus their capital on projects that have a direct impact on identified rural communities.
- Definition & Identification of Rural Zones
Treasury Notice 2025-50 has identified 3,309 rural OZ tracts as qualifying zones. None of those rural zones, however, will be automatically eligible for new investments on January 1, 2027.
Instead, state governors must propose eligible opportunity zones to the Treasury by July 1, 2026, in alignment with the Notice 2025-50 definition, for federal review and approval. This introduces a renewed role for state leadership in shaping where Opportunity Zone capital can be utilized.
For investors and developers, this process makes staying informed especially important. Keeping up with designation timelines and regulatory updates can help ensure rural projects remain eligible for Opportunity Zone investments.
- Superior Basis Step-Up After Five Years
QROF investments held for five years receive a 30% increase in tax basis, which is a significant increase to the 10% for non-rural QOFs. This increased basis step‑up lowers the amount of capital gain that will eventually be taxed, which can improve after‑tax returns for long‑term rural investments. It also addresses the longer development timelines and higher execution risk often associated with rural projects.
- Tax Deferral Timeline
Capital gains reinvested in a QROF are deferred for five years from the investment date.
Under OZ 2.0, the deferral period is measured based on when the investor contributes eligible capital gains to a Qualified Rural Opportunity Fund, rather than expiring on a single predetermined date as it was under the original Opportunity Zone program. Each qualifying investment therefore begins its own five‑year deferral period.
- Tax-Free Appreciation After Ten Years
All appreciation in QROF investments held for ten years becomes permanently tax-free, mirroring the treatment of the original opportunity zone program.
This provision may be especially relevant for longer‑term rural investments, where value is often realized over time rather than through short‑term appreciation. For investors with longer holding periods, these Opportunity Zone tax benefits may offer planning advantages compared to more traditional capital gains strategies.
- Reduced Substantial-Improvement Requirement
For rural OZ properties, the substantial-improvement mandate drops from 100% to 50% of the property’s adjusted basis, meaning 50% of the invested capital must be applied to improvements or development.
This reduction lowers the capital threshold required to rehabilitate or repurpose rural properties and may improve feasibility for projects involving existing or underutilized assets in rural markets.
- Rolling 10-Year Designation Cycle
QROFs and all QOF investments now benefit from a permanent OZ structure, with zones redesignated every 10 years, with the next cycle beginning January 1, 2027.
A permanent designation framework will now help to reduce uncertainty under the original program. This allows investors, fund sponsors, and local stakeholders to plan development initiatives with longer timelines and greater confidence in program continuity.
These enhancements are structured to boost development in rural America, increasing return on investment, and offering long-term economic incentives. For investors considering rural real estate, agriculture, infrastructure or small business ventures in rural OZs, QROFs present an especially compelling opportunity.
Windham Brannon’s tax professionals continue to stay current with legislative updates such as OBBB so that we may advise clients on sensible tax strategies regarding their capital gains and other tax-saving possibilities. Should you have any questions about the benefits of investing in opportunity zones under the new OBBB legislation, please reach out to Gary Gruner.
