The IRS recently issued Notice 2025-50 for the purpose of identifying each designated qualified opportunity zone (a “QOZ”) census tract that qualifies as a “Rural Area” for purposes of the recently enacted One Big Beautiful Bill Act (the “OBBBA”).
Under the OBBBA, a “Rural Area” is defined by exclusion, including only those areas that are not (i) cities or towns that have a population of greater than 50,000 inhabitants, and (ii) urbanized areas contiguous and adjacent to such cities or towns described in (i) above. To the extent that a qualifying investment is made directly by a qualified opportunity fund (a “QOF”) or indirectly by a qualified opportunity zone business (a “QOZB”) in a Rural Area, a more lenient set of rules and additional tax benefits apply to such project investments.
Specifically, the OBBBA amended the substantial improvement thresholds for property improved within a Rural Area. Under the general substantial improvement rules, a QOF or QOZB, as applicable, must, over the course of a 30-month period, make additions to the basis of its tangible property that exceed an amount equal to 100 percent of such property’s adjusted basis at the beginning of the 30-month period. In essence, the QOF or QOZB is required to double the basis of its acquisition cost for its tangible property to meet the substantial improvement requirement. If, however, the tangible property is located within a QOZ that is identified as a Rural Area, the OBBBA reduces the substantial improvement requirement from 100 percent to 50 percent. Instead of doubling its basis on improvements to tangible property, a QOF or QOZB with tangible property located in a Rural Area can cut those expenditures in half and still meet the substantial improvement requirements.
Using 2020 Decennial Census Data, the IRS identified from the 2018 QOZs 3,309 Rural Areas in the Appendix to Notice 2025-50. Unlike most of the QOZ provisions in the OBBBA, the reduced substantial improvement requirements applicable to Rural Areas became effective upon the OBBBA’s passage on July 4, 2025. That said, QOFs or QOZBs with tangible property located in a Rural Area, as identified in IRS Notice 2025-50, that has been or is in the process of being improved can take advantage of the beneficial substantial improvement rules immediately. Notably, a second round of QOZ nominations will take place in 2026, with new QOZs and, thus, new Rural Areas, being designated as of January 1, 2027. Developers and/or investors considering QOZ investments in census tracts currently identified as Rural Areas should consider acting before December 31, 2026, to ensure such tract’s designation as a Rural Area QOZ.
